On Friday, April 29, the Board of Directors of the Central Bank decided to keep key interest rate at its current level of 11%.
Such a solution, the Central Bank is expected by most economists and portfolio managers surveyed (22 of 31). The main reason for this forecast is the lack of budget balance, experts say.
An unbalanced budget is one of the major risks for the ruble exchange rate, and for inflation and for economic growth, enumerates economist for Russia at BNP Paribas Eldar Vakhitov. “In the absence of clear information about the taken measures by which the government is going to reduce the budget deficit, is subject to speculation that other things being equal it would not object to the weakening of the ruble, because this would increase the ruble budget revenues,” he explains. Measures to reduce costs are also not accepted, therefore the risks of the second indexation of pensions and increase of tariffs above planned levels, which again leads to higher inflation, continues Vakhitov.
The growth of the budget deficit and the lack of sources of replenishment of a profitable part lead to higher debt servicing costs and negative rating actions, adds chief analyst at Nordea Bank Denis Davydov. “It undermines not only the national currency but also the economy as a whole,” he says.
The Central Bank has set the rate at 11% in July 2015 and the results of the last five meetings of the Board of Directors, leaving it unchanged. At the previous meeting in March, the Bank of Russia indicated that to achieve the inflation target of the Central Bank can pursue moderately tight monetary policy for a longer time than previously thought. Regulator mentioned the reduction of the structural deficit of liquidity as a factor in softening of monetary conditions to the real sector without the need of lowering the key rate. Finally, the Central Bank reiterated concerns about inflation risks from the budget, in particular due to the additional indexation of salaries and pensions.