Analysts: a weaker ruble tying the hands of the Central Bank to reduce rates

Analysts: a weaker ruble tying the hands of the Central Bank to reduce rates


Friday will be a regular meeting of the Central Bank on key rate. High inflation, coupled with elevated inflation expectations and the weakening of the ruble will keep the Central Bank from sudden movements, analysts say.

MOSCOW, 30 Oct. The majority of analysts surveyed, see no fundamental reason for the reduction in the key rate Bank of Russia: in their opinion, high inflation, coupled with elevated inflation expectations and the weakening of the ruble amid falling world oil prices will keep the Central Bank from sudden movements.

However, the rest of economists do not exclude that the continuing decline of the Russian economy may cause a cautious easing of the monetary policy of the regulator to stimulate economic growth.

After the strongest since a default of 1998 collapse of the ruble financial system of the Russian Federation was held in December, 2014 a real test of strength. Then the Central Bank suddenly and sharply raised its key interest rate from 10.5% to 17% per annum. This year the Bank of Russia gradually cut the rate. However, in the meeting of 11th September, the regulator for the first time since the beginning of the year has left it unchanged at 11% per annum.

A regular meeting of the Board of Directors of the Central Bank rate will be held on Friday. In case of rate cut by 50 basis points it can reach pre-crisis level of 10.5% per annum.

“Although the market in recent times provides the reduction of the key rate by about 50 basis points, from a fundamental point of view reason for such a scenario right now a little. The Central Bank captures the continuing growth in inflation expectations, according to a survey of “Infom”. Secondly, still not declining inflation trend, which reflects the monetary inflation risks, while the Central Bank previously indicated that the prospects for its reduction. The third factor is that the ruble began to weaken against the background of falling oil prices at an accelerated pace,” notes Raiffeisenbank Maria macroanalytic Pomelnikova.

The Central Bank will take a wait and see attitude

Analysts are inclined to believe that the regulator in the current macroeconomic conditions will not hurry with rate reduction. This urge and the Ministry of Finance. The Deputy Minister of Finance Maxim Oreshkin believes that the pressure on oil prices carries additional risks for the Russian economy, so the Central Bank needed to take a rate decision “carefully, considering all factors.”

“In such circumstances, more logical would look wait-and-see position of the regulator in the remaining months of the year and the decline rate in the first quarter of next year, when inflation will reduce significantly due to the statistical effect of comparison with the high base of the first quarter of this year. But in the medium term, expectations of a rate cut is completely justified, as in the baseline scenario, inflation will continue to decline, and even if it is above the guidelines of the Central Bank, the trend is still downward,” believes Pomelnikova.

According to Rosstat, weekly inflation in Russia from 20 to 26 October remained at the level of the previous two weeks in 0.2%, since the beginning of the year consumer prices have gained 11.2 percent.

According to an analyst of Raiffeisen Bank, by December the pressure on the ruble may increase as a result of large repayments of external debt. In such circumstances, the resumption of the easing cycle in monetary policy may create additional risks for the currency market, and, ultimately, to inflation.

At the same time, currently the rate reduction by 50 basis points are already incorporated in the expectations, so now the ruble, rather, reacts to maintain rates at the current level, I’m sure Pomelnikova. But if we talk about the term until December 2015, an earlier start of gradual rate cuts negative for the ruble.

Will leave it as is

The independent financial analyst Vladimir rojankovski sees no particular plot in the forthcoming meeting of the Central Bank of the Russian Federation — in his opinion, the key rate will likely remain unchanged.

While the actions of the Russian regulator in varying degrees, affect the decision of the U.S. Federal reserve, analysts say. The fed on Wednesday once again left its key rate at a record low level of 0-0. 25% per annum. However, the American regulator gave the signal of a possible rate hike in December, depending on the key macroeconomic factors — unemployment and inflation.

“Probably, the Bank of Russia will follow the example of “overseas partner” and this time will refrain from targeted monetary actions,” believes rojankovski.

With him agrees a well-known economist, member of the Expert Council under the government of Russia Yaroslav Lissovolik. “My expectations are that changes in the key rate will not. If they will change little — at 25 basis points is due to the fact that in the last few weeks we have seen a fairly significant decline in oil prices and the weakening of the ruble,” he said.

Chief analyst at Nordea Bank Dmitry Savchenko expects the Central Bank’s decisive action until December. “We expect that the rate will remain in place. First, in October was a small uptick in inflation. Secondly, despite a slight strengthening in September and October, now due to the volatility of oil, there are some risks weakening of the ruble, and consequently, increase the risk of inflation of the ruble”, — he motivates his opinion.

Senior economist for Russia of the company “Opening the Capital” Daria Isakova sees more arguments in favour of the Central Bank not to rush to lower rates, but the point to this possibility.

“I think the Central Bank will cut rates in December and, most likely, it will show on Friday — the alarm will be added, this will be some softening of the rhetoric,” says Isakov. She noted that the overall balance of inflationary and economic risks has remained virtually unchanged since the last decision, therefore, the Central Bank “will maintain a wait-and-see approach and will prefer the most conservative approach in this Friday”.

“Factors that play behind the improved Outlook for inflation — the strengthening of the ruble, a small pension indexation, and disinflation — all of them are quite fragile”, she added.

In the name of economic growth

In turn, analyst at Bank of America Merrill Lynch Olga Veselova does not exclude the rate cut by 0.5 percentage points.

“The Ministry of economic development declares that “bottom” has passed and will slow the economic recovery. Against this background, to support the economy and the possible easing of monetary policy. But inflation, of course, and the ruble remain limiters sudden movements from the Central Bank,” she said.

Senior analyst of “URALSIB capital” Olga Sterol believes that the trend to lower rates will prevail, at least in the next six months.

“We were sure that after a pause the Central Bank will continue to normalize interest rates and reduce rate by 50 basis points on Friday. Recent inflation data is not very good, not in favor of rate cuts in recent days the rouble has become quite volatile, and reduced rates may put additional pressure on the ruble. However, we do not change our forecast and expect that the Central Bank would likely reduce (bet — ed.), although such confidence gone,” she says.

“The main argument in favor of reducing the rate of the Central Bank — the difficult state of the Russian economy. Even considering the fact that in recent months there has been some improvement in the dynamics of the main macroeconomic indicators, the decline is still large. In conditions when the Central Bank rate remained double-digit, there is a large supply to support the real economy through changes in monetary policy,” — noted in “Sberbank CIB”.