MOSCOW, January 29. The Central Bank on Friday gave the market two key signals about the risks of failure of the target inflation at 4% in 2017 and a possible new round of increase in the key rate. Both statements correspond to the situation in the economy, which is characterized by a surge in inflation expectations due to the weakening of the ruble, the deepening recession amid falling oil prices and the risks of fiscal policy. At this rate it was decided to leave at 11% per annum.
The Bank of Russia kept its key rate unchanged at 11%
The Central Bank on Friday abstained from changes in the macroeconomic forecast, which is now, most likely, will appear March 18 – at the next meeting of the Board of Directors. By this date should already have published updated projections of economic development and Finance. While the Central Bank has outlined the direction of change, saying a possible rise in inflation in the 2nd quarter, a more severe decline in GDP for the year and likely lowering the forecast on oil prices. While the baseline forecast of the Bank of Russia seems too optimistic: oil $50 per barrel, inflation is only 5.5-6.5 per cent, the decline in GDP by 0.5-1%. While the overall situation in the economy probably reflects stress scenario the Central Bank: oil at $35 a barrel (now $32), inflation 7% (now annual 11.5 per cent), the GDP is 2-3%.
The key rate remains at 11% since August of last year. In the first half of 2015, the Bank of Russia gradually cut the rate, mitigating the impact of “interest rate shock” of December 2014, when the rate was raised from 10.5 to 17% per annum.
The market did not believe
If in previous releases, the Central Bank reported about intention to reduce the rate on one of the next meetings, today appeared a completely different message: “In case of strengthening of inflationary risks the Bank of Russia does not exclude the tightening of monetary policy”, that is, above all, increasing the key rate. However, stress scenarios of the Bank of Russia, which in March had now close the situation in the economy, and so increase the key rate is not excluded.
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Despite this apparent change of rhetoric, the market regulator did not believe it. Analysts remain extremely low marks for a rate hike, but the ruble after the publication of the decision of the Central Bank began to weaken after a morning of growth. According to economists, the Central Bank simply wants to leave himself room to maneuver. “The Central Bank leaves the room for maneuver, advance warning about this economic agents. I think, if foreign exchange market no panic will not occur, even then it is not a threat, but the hint will remain unfulfilled,” – said the Deputy head of the Center for economic forecasting of Gazprombank Maxim Petronevich.
Chief economist for Russia and CIS “Renaissance Capital” Oleg Kuzmin estimates the probability of a key rate increase in 2016 is only 15-20%. “This can be done in two cases. In the first, if due to low oil prices, we have some panic on the currency market, increased capital outflows and then it can be a sharp rise in rates, similar to what it was in December 2014,” he says. The second case is if the low oil price for a long time keep the ruble weak. In this case, “closer to the middle, the Central Bank increases 1 or 2 times rate by 0.5 percentage points, to show that he is struggling with inflation”.
In turn, the chief economist of Alfa-Bank Natalia Orlova, although it acknowledges the current review of the Central Bank “very hard”, does not consider it very likely increase rates. However, she warns that the sharp increase in rates is inefficient. “The Central Bank is more likely to involve some support from exporters. This is a more effective mechanism than to raise the interest rate,” she said.
Deviation from goal
The Bank of Russia has chosen an inflation target of 4% in 2017 in the summer of 2014 and since then never from her do not back down. Why it is so important today, was the statement that “the risks of deviation of inflation from target at the end of 2017 increased”.
According to Petronevich, there is nothing wrong in falling below the target of 4% next year, because the goal of 4% is for the Central Bank and the medium-term reflects rather the intention of the regulator to achieve it sooner or later. “It’s kind of an abstract goal for 2-3 years. It is clear that for various reasons the inflation rate in a particular year may deviate. The experience of the Bank of England, which is quite a long time did not perform a benchmark, but in his letters he said, why it happened, suggests that this is nothing serious,” he says. Orlova from Alfa-Bank also believes that the goal of 4% is achieved, but later. “The Central Bank will not waive the 4 percent benchmark, just say that it will be achieved in later years. Although, I think it would be better to put a reference point that we can achieve than to set a benchmark, which we will move from year to year,” she says.
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Possible problem with achievement of the inflation target – not the fault of the Central Bank, economists said. The regulator since the autumn of last year have to face a number of challenges to which it has no direct effect. Among them are toughening of conditions of food imports, increasing bets the U.S. Federal reserve, a slowing Chinese economy, falling oil prices and other challenges. In such circumstances, the regulator has no alternative but to continue their line. “One option for the Central Bank to retain a more strict policy. Because, in fact, now the choice is between slightly more or slightly less than the worst real, for the future,” – said Oleg Kuzmin.
Business believes the Central Bank’s decision as “logical” from the point of view of inflation target, but destructive to the economy. “This decision will discourage economic growth and development in Bank lending. The economy is now much needed positive signals, so the key rate should be reduced at least by 0.25 percentage points and in any case not to scare the tightening of monetary policy,” says the co – chair of the Committee “Business Russia” OST Vladimir Gamza.