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Monday, November 20, 2017

The Central Bank and the Ministry of Finance impeded further strengthening of the ruble


The Central Bank for the third time in a row refrained from lowering the key rate, and the Finance Ministry is preparing to buy up the domestic currency. And this is despite the positive macroeconomic statistics, the reduction of the budget deficit and record low inflation. The actions of the Central Bank and Finance Ministry have a direct impact on the ruble.

The Board of Directors of the Bank of Russia at the first meeting in 2017, decided to keep the key rate at 10% per annum, according to a press release from the Central Bank. The regulator for the third time in a row saves a bet at this level. The next time the Board of Directors of the Central Bank will meet to discuss the key rate on March 24.

“Tight monetary policy of the Central Bank in conjunction with the rapid slowdown of inflation led to a sharp increase in real interest rates”

Economists had expected this decision, but the business community would be surprised. Because macroeconomic indicators are good, which should move the Bank of Russia to ease monetary policy. The theme of the fall in GDP in the last year was lower than the boldest forecasts of the agencies and analysts – minutes of 0.2%. Inflation for the year slowed to 6%, and by the end of January will be reduced to 5%. The ruble also remains stable and relatively high oil prices.

The Central Bank admitted that inflation risks have declined. So 0.5% of the Central Bank could lower the rate without any problems. However, this did not happen. “On the Central Bank’s plans was influenced by the decision of the Ministry of Finance on the introduction of new fiscal rules, although in its release the Bank denies it,” – says Anna Kokoreva of “Alpari”.

Earlier, the Finance Ministry has already warned that in February will begin to buy foreign currency on the domestic market and attract for this purpose the Bank of Russia. The office explained that the need to reduce the impact of global oil prices on the Russian economy. According to the budget rule, the Finance Ministry will buy foreign currency when the price of oil above the budgeted level of 40 dollars per barrel and sell currency will be if actual prices will be lower.

On Friday, the Finance Ministry said the volume and start time of buying the currency. From 7 February and 6 March the Ministry of Finance every trading day to buy the currency at 6.3 billion rubles. For these purposes will be allocated the entire amount of additional oil revenues for February, which are expected in the amount of 113.1 billion rubles. Daily transaction volumes of office would be equivalent to about 100 million dollars per month will be bought almost 2 billion dollars. Moreover, in the first quarter will have to pay more than $ 15 billion on foreign debts.

Last time the Central Bank conducted foreign exchange intervention a year and a half ago, in July of 2015. Although the Finance Ministry says that the purchase of currency will have an impact on the money market and the ruble, but in practice, these operations carry risks of weakening of the ruble and increasing inflation risks. Therefore, the Central Bank. “In these circumstances, the regulator did not further increase the volatility of the markets and the pressure on the ruble due to the decrease in rates” – explains the Deputy Director of the Center for macroeconomic forecasting of the Bank Natalia Shilova.

“The key risk is the intervention of the Ministry of Finance, which will be about $ 2 billion in the first month and can significantly increase in case of further growth of oil prices that will lead to an increase of liquidity and to limit the prospects of strengthening of the ruble. Accordingly, the Central Bank will be forced to further sterilize the liquidity, and the tone of the statement, the Central Bank has become significantly tougher,” – said Shilov. The regulator noted that the prospects of a rate cut in the first half decreased. He is afraid of dispersal of inflation, and its goal remains to reduce it to 4% this year.

However, on the other hand, Russia retains the high interest rates that hinder the development of the Russian economy. “Tight monetary policy of the Central Bank in conjunction with the rapid slowdown of inflation led to a sharp increase in real interest rates. Interest rates on corporate loans reached 6% in real terms. In these circumstances, the corporate sector has not yet seen signs of recovery in investment activity, despite a high return on capital, and lack of capacity. Economic transformation is possible only after reduction of interest rates,” warned analysts at Sberbank Investment Research.

Therefore, experts still hope that at the next meeting, the Central Bank decides to lower the rate again. According to expectations, by the end of 2017 rate should be reduced to 8.5–9% with inflation at 4.5%. “Against the background of a favorable external environment of the intervention of the Ministry of Finance will only hinder the strengthening of the ruble against the background of growing oil prices, but will not be able to provoke him a sharp weakening – expects Natalia Shilova. Accordingly, weak economic growth and a stable ruble will contribute to maintaining low inflation and Central Bank will open opportunities to further reduce rates”. Thus, further lowering of lending rates can be expected probably in the second half of the year.

In favor of the fact that the Central Bank will still cut rates this year, they say, and the expectations of the government and the banks themselves. So, the subsidy program of mortgage lending covered in the calculation as to what the decline rate of the Bank of Russia the interest rate on your mortgage will be and so reduced market (12%).

As for the ruble, the experts indicate a clear trend reversal. In the medium term, the Russian currency will weaken, and the middle of spring, the dollar may reach 64 to 65 rubles, while the Euro – ruble 65-67, says Anna Kokoreva.

While oil may continue to remain at current levels or even rise. Restraint of the fed and rising geopolitical risks in the middle East – here is a simple recipe for the growth of oil prices, the analyst FG BCS mark Bradford. The price of Brent already above $ 56 per barrel due to the fact that the fed refrained from confirming its plan to hold three rate increases this year. Supported oil quotations also another statement trump about the possibility of imposing new sanctions against Iran.

All this creates prerequisites for growth of the Russian stock market and ruble, but the Ministry of Finance and the Central Bank is clearly holding back this trend.

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