Rate on the “bubble”: what risks interfere with the Central Bank to ease policy

The threat to the stability

Slightly less than half of the surveyed economists (14 from 32) believe that the “bubble” in the financial market poses a threat to financial stability and may force the Central Bank to tighten monetary policy. That in the credit market may “bubble” a week ago warned the first Deputy Governor of the Bank of Russia Ksenia Yudaeva. According to her, the cause would be a shift from structural deficit to surplus Bank liquidity. However, the main problem is not excess liquidity, as such, but in its uneven distribution among the banks.

The economic crisis led to the decline in business activity, many companies have closed, due to which, banks have lost the clients who kept funds in Bank accounts, said the Director of macroeconomic policy Department and cluster analysis of Vnesheconombank Oleg Bolt. These banks, he said, are experiencing shortages of liquidity. At the same time, state-owned banks, by contrast, does not need the money. “In such circumstances, the “extra” money, first of all, go to the financial market and contribute to inflating bubbles,” he explains. At the same time until until the credit market are the banks in need of liquidity, the Central Bank will not significantly reduce the level of funds available for refinancing, adds economist at Berenberg Bank wolf Fabian Hungerland.

The “bubble” part is already formed on the Eurobond market, where significant volumes of free monetary liquidity provoked a strong decrease of the yield of securities, said the chief expert of Center for economic forecasting of Gazprombank Yegor Susin. “Bubble” is on the rouble bond market, where rates and yields have fallen to pre-crisis level, and when oil was higher, and there were no sanctions, adds the managing Director of Arbat Capital Alexey Golubovich. The “bubble” formed this with the help of the Central Bank (currency REPO, for example) and in the interests of large borrowers and of the Ministry of Finance. He collapses with the General crisis in emerging markets, and then the consequences will be negative for the banking system and a moderately negative for the corporate sector,” adds managing Director of Arbat Capital, Alexander Orlov.

“The consequences can be very serious and the risk of a correction in financial markets is growing,” says BNP Paribas economist for Eastern Europe Michal Dybula, adding that the crisis in financial markets is strongly reflected in the real sector.

But the Bank of Russia in forces to rectify the situation, absorbs the liquidity, said the head of analytical Department of Bank “Zenith” Vladimir Evstifeev: “the Central Bank has already sold in April-may, approximately 60% of its portfolio OFZ bonds in the amount of about 120 billion rubles. Further, the controller can resort to classical tools: Deposit auctions, the issuance of bonds of the Bank of Russia and so forth.”

The threat of global volatility

Another risk to financial stability in Russia is creating volatility in global markets. In the latest “financial stability Review, the Central Bank has indicated that it is impossible to exclude its “new waves”. Most economists and analysts (28 of 32), believe that the concerns of the Central Bank justified.

The risk that volatility on world markets will increase, a significant, said the chief economist at Danske Bank Vladimir miklashevskii. Constantly changing expectations of investors about the fed’s policy, “oil on the fire adds to fears of a possible British exit from the EU.” In addition, commodity prices fluctuate on the background of decelerating growth of China’s economy, he enumerates.

The volatility on world markets will be, but the economy is already largely adapted to the new reality of oil prices and the direct impact of the sanctions this year less painful — payments on the external debt is two times less than in 2015, says chief economist for Russia and CIS “Renaissance Capital” Oleg Kuzmin.

Sharp fluctuations in oil prices are the main risk for Russia, says Susin. “The balance of supply and demand in the oil market, which we see now are largely artificial and due to a succession of one-off supply disruptions due to emergency situations in different regions of the world. Obviously, this can’t last permanently, hence maintaining the risk of falling oil”, — said the chief analyst of Bank “GLOBEKS” Alexey Balashov.

“The volatility spikes, which says the Central Bank, can facilitate the outflow of capital from Russia, said the chief analyst “IK VELES Capital” Yuri Kravchenko. “The logical prevention of such risks is to keep the key interest rate at a level attractive to investors, that is, at current,” he adds. The Director of the analytical Department of the IR REGION Valery Weisberg agree that the Central Bank will not rush with the reduction of the key rate, not to provoke increase in the outflow of capital. 17 of 28 economists believe that the volatility in world markets, the Central Bank will react to tighter monetary policy.

Opinions differed

The views of economists and analysts surveyed, as to how to proceed, the Board of Directors of the Bank of Russia on Friday, 10 June, almost evenly divided: 15 of 32 experts believe that the Central Bank will leave the interest rate at 11% per annum, 17 — which will reduce rates by 50 b.p. to 10.5%.

Now there are all prerequisites for reducing the rate, said Vladimir Evstifeev from Bank “Zenith”: “the annual inflation rate was steady at 7.3%, the ruble has stabilized against the background of rising oil prices”, also, “the economy still needs support”. Decelerating inflation and the situation on the financial market, in theory, create the preconditions for even more aggressive reducing, I’m sure the bar out of the Bank. “But uncertainty about other factors such as oil prices and actions of the fed, forcing the Central Bank to be very cautious in their actions,” he adds.

Economists Citi’s Ivan Tchakarov and Ekaterina Vlasova also predict that the Central Bank will cut rates by 50 b.p. but at the same time called for two reasons, because of which he can leave it as is. Firstly, the Central Bank is still not convinced that the recovery in oil prices will last long; secondly, the regulator continues to struggle with inflationary expectations.

Chief economist of “Alfa-Bank” Natalia Orlova said there are three factors, which the Central Bank will leave the rate unchanged: firstly, the fed may soon raise rates, which will increase the volatility of the financial markets; secondly, from the beginning, accelerated wage growth, and this can increase inflationary pressure in the second half of the year; thirdly, the risk budget is: up to the end of the year the budget expenses will grow by 9% year-on-year, that is higher current inflation. The Central Bank will continue to operate in a conservative way and will postpone the rate reduction until the next sessions, I’m sure Balashov of “GLOBEKS”. “In this case the regulator will be able to wait for the reaction of financial markets to the referendum results in the UK and greater certainty in fed policy,” he says.

Hangerland of Berenberg Bank also believes that the Central Bank will lower the rate at the next meeting. It’s still early, he said. “In the eyes of [Elvira] Nabiullina & Co Russian recovery should prove its stability. In addition, there is no hysteria, which forced the Central Bank immediately and to act decisively (as in January 2015),” he says, adding that “inaction on Friday not angry people, while a premature rate cut will increase the potential re-acceleration of inflation”.