CBR lit green light on ways to reduce rates

CBR lit green light on ways to reduce rates

The Central Bank may resume reduction of the key rate on one of the next meetings of the Board of Directors as the slowing of inflation, the message of the regulator.

MOSCOW, 30 Oct. The Bank of Russia for the second time this fall has not pleased the market by the reduction of the key rate since August she is kept at 11% per annum. Stubborn inflation and a weakening ruble does not give the regulator the opportunity to ease its policy, warned analysts on the eve of the meeting of the Board of Directors of the Central Bank. However, the rate may be revised in the near future, promised by the Central Bank, surprising economists with unexpected frankness.

Itself suggests comparing the rhetoric of the Russian regulator with its overseas counterpart — the fed. This week the U.S. Central Bank also kept rates at the same level, did not rule out a rate hike in December, depending on the dynamics of key macroeconomic indicators — employment and inflation. However, economic conditions in the U.S. are such that the fed has to keep the base rate at a minimum level of 0-0. 25% per annum.

The main task of the Russian Central Bank is to target inflation at 4% in 2017. To achieve this, the regulator has chosen a moderately tight monetary policy. However, while inflation “shows character” and is in no hurry to slow down, that do not contribute to high inflation expectations. But the Bank of Russia believes that inflation will fall by more than half in October 2016 will be reduced to 7% from 15.6% currently.

“With the slowdown of inflation in accordance with the forecast of the Bank of Russia will resume the reduction of the key rate on one of the next meetings of the Board of Directors”, — said the Central Bank in its statement. Analysts have called the October press release of the CB watershed.

“I wonder what they put it in clear text. It seems to me that all of their previous releases were much more cautious. Never before they’re clearly not made statements. That was a surprise” — did not hide their emotions, chief economist at Alfa Bank Natalia Orlova.

The softening of rhetoric without any unnecessary movements

Analysts considered the decision of the Central Bank to keep rate unchanged at 11% justified. “We were among those who were expecting a decrease. What we see in the accompanying comments, it is rather that the October meeting was transitional in the actions of the Central Bank in the sense that they drastically softened the rhetoric for the next several meetings”, — said the analyst of ROSBANK Eugene Koshelev.

If in the beginning of the week investors were almost one hundred percent sure of the rate reduction, by the end of the week the mood has become more cautious, the regulator pointed to too high inflation, which is absolutely true, and did not make any sudden movements, recalls a senior analyst “Alpari” Anna Bodrov.

“The Central Bank focuses on the absence of changes in the balance of economic and inflation risks inflation remained high and the decline of the economy compared with the previous session even slowed down,” says the macroeconomist Raiffeisenbank Maria Pomelnikova, which expects that the Central Bank may resume lowering the rates, if not in December 2015, in January 2016.

“In our base scenario, the following Board of Directors December 11, the rate will be reduced by 50 basis points. They may keep policy rate unchanged in the case of weakening of the ruble to about 70 rubles to the dollar, or if there will be strong expectations that the fed will tighten policy on 16 December,” predicts economist of “Renaissance capital” Oleg Kuzmin.

Leaving the key rate unchanged, the regulator has shown that the balance has shifted toward heightened inflation risks. “Annual inflation has remained at a high level and the spread between it (15.5%) and mortgages (11%) is now the most significant in the last 12 months. If we proceed from the fact that the economy has bottomed, the rate reduction will not have a stimulating effect, which was supposed to provide in theory,” said the analyst of Gazprombank Gulnara Hidersine.

The balance of risks

The reasons for excessive optimism from the Central Bank in relation to the key rate do not add and external conditions, uncertainty in oil prices and the economic slowdown in China, analysts say. “Further development of the economic situation will depend on the dynamics of global energy prices, and the speed of adjustment of the economy to external shocks occurred,” believe in the Central Bank.

The dependence of the ruble, oil prices persists, but the ruble is not so nervously reacts to them. First Deputy Chairman of the Central Bank Dmitry Tulin for a few hours before the traditional “week of silence” before the meeting of the Board of Directors has declared that now to ensure the stability of the ruble is not yet possible in the Central thinking of how to mitigate the effects of fluctuations of the ruble. At the same time, he pointed out that the regulator is satisfied with its current volatility.

“We believe that the decision may provide some support for the ruble, although the effect on exchange rate is limited to world oil prices. In the coming days the potential change in the price of oil will be more important for the ruble than the rate decision”, — says economist of “Renaissance capital” Oleg Kuzmin.

The decision of the Central Bank did not go unnoticed to the ruble immediately after its announcement, the ruble strengthened growth, the dollar fell below 64 rubles, losing about 30 cents. The price of Brent crude oil is teetering at 49 dollars a barrel.

“There’s the question of balance of risks: what will happen, what risks will go to the fore, which will gradually subside. I think that it is difficult to make. With a good external scenarios with relatively calm inflationary dynamics, probably in December we will see a solution to mitigate”, — says Evgeny Koshelev of ROSBANK.

According to the analyst of Gazprombank, are now seeing the effect of the postponement of the August devaluation of the ruble. “Because it was short term, it is likely that this effect is now runs out, and inflation will continue to cut in the borders, which has been included in the forecast of the Central Bank (12-13%). Accordingly, if the Central Bank will see inflation moving towards the forecast levels, we might cut the rate at the December meeting,” expects Hidersine.


Meanwhile, a statement by the Central Bank about the possibility of a rate cut contains a number of dangerous consequences, analysts warn.

“Surprisingly, from the very beginning of the release is worth comment that the Central Bank is prepared to continue lowering rates at the next meeting. It seems to me that the external environment is now very complex — the fed hinted that it would raise the rate, for China the situation is difficult — there economic growth is slowing down, oil in principle is not growing above $ 50. Arguments for rate to move down a bit, and it is dangerous”, — says Orlova from Alfa Bank.

However the Central Bank may not fulfill his promise for reasons beyond its control. “To break this scenario from the point of view of Central Bank would the preservation of inflation expectations at an elevated level, the deterioration in the external environment, the revision of regulated tariffs for 2016-2017 and the easing of fiscal policy. We maintain our forecast about the reduction of the key rate by 100 basis points over two meetings in the short term,” said Pomelnikova from Raiffeisenbank.

If inflation will slow down, and the price of oil does not collapse, then next year the key rate may reach 7-8% by the end of 2016. “So policy easing will in any reasonable scenario,” — said Kuzmin from “Renaissance capital”.