Experts predicted the reduction of the key rate of the Central Bank

The Board of Directors of the Bank of Russia at the meeting on Friday, September 16, will take a decision about lowering the key rate, which is from June 10 is 10.5% per annum, according to the majority of the analysts of Russian and foreign banks.

At the previous meeting on 29 July, the Central Bank left rates unchanged, explaining his decision to meet the dynamics of inflation and the incipient recovery in economic activity as a result of a moderately tight monetary policy. The only time this year the Central Bank reduced the rate in June. The regulator reduced it by 0.5 percentage points, ending a run of six consecutive meetings, after which it remained unchanged.

19 of the 22 analysts polled banks expect rate cuts on September 16 on 50 b.p. up to 10%. According to the consensus forecast, year-end rate drops to 9.5%. All interviewed banks, only UBS and Citi analysts predict that it will decline to the end of the year to 9%.

Risks to inflation

Experts say very harsh rhetoric of the head of the Central Bank Elvira Nabiullina at a banking forum in Sochi last Friday, September 9. Then she announced the intention to maintain a moderately hard course of its monetary policy [including key interest rate at a level a few points higher than inflation], the persistence of inflated inflation expectations above the target level of 4%.

“The rise in prices in General is not slowing down, despite his absence in August (relative to July) and an increase of less than 1% in July — says the analyst of the center of forecasting of Gazprombank Maxim Petrovich. In his opinion, in this regard, the regulator will take a decision to leave the rate in September at the level of 10.5%. “Nevertheless, we expect that by the end of the year inflation will be 6% or even lower,” the analyst added.

One of the main threats for achieving the target of inflation experts interviewed referred to the fiscal policies of the government. “The Central Bank should resist proinflationary pressure from budget costs”, — says the analyst of Raiffeisenbank Stanislav Murashov.

As noted by the chief economist of Credit Suisse in Russia Alexey Pogorelov, the regulator is also concerned about potentially high-growth unsecured (bezzalogovogo) consumer credit, resulting in a decrease of inflation.

On speech, September 9, Nabiullina warned that in the short term, the banking sector is waiting for a structural surplus. As explained by Pogorelov, although the transition is expected for several months [depending on the direction of fiscal policy], it has already begun to affect the policy of the Central Bank. In the transition process is almost automatic monetary easing. “The key rate becomes a benchmark for rates of placement of funds, not interest rates to attract funds. Such role changes of the key interest rate essentially equivalent to its reduction,” — said Nabiullina. “According to the regulator, a consequence of the transition to surplus was a sharp decline in savings in local currency and profitability of rouble bonds” — like mush.

In the conditions of surplus liquidity, the Central Bank will maintain its key interest rate at a higher level than the deficit, says the analyst. “In addition, Nabiullina noted that the improvement in inflation, the Central Bank does not necessarily provide a reason for monetary easing, as the Bank focuses on achievement of inflation target in 2017”, — the expert adds Credit Suisse.

According to Oleg Kuzmin from the Bank “Renaissance Capital”, to prevent [further] reduction rate and uncertainties regarding the dynamics of oil prices and fiscal policy ahead of elections in 2018, as well as high wage growth in the economy and just greater proximity to the end of 2017, when the Central Bank wants to see inflation at 4%. Uncertainty about oil prices and, accordingly, the dollar against the ruble forced the Central Bank to maintain a relatively tight monetary policy, despite recent improvements in inflation expectations, echoes Berenberg Bank economist Carsten Hesse.

Risks for the budget

Many respondents, analysts note the presence of significant fiscal risks in achieving the Central Bank target for inflation. According to Oleg Kuzmin of Renaissance Capital, they are associated mainly with continuing uncertainty regarding fiscal policy ahead of elections in 2018. Risks remain high due to the fact that the parameters of indexation of tariffs and salaries for the following year made a significant contribution to inflation,” notes the analyst of Raiffeisenbank Stanislav Murashov.

Despite the continuing uncertainty over fiscal policy, the government will maintain a responsible fiscal policy in the years 2017-2019, so budget risks which are concerned, the Central Bank, not materialists, says the analyst of ING Bank Dmitry Polevoy. Fiscal risks in 2016 has significantly decreased, but rose the following, says chief economist at Alfa Bank Natalia Orlova. In her opinion, “one-time payment of 5 thousand. in January and indexation of pensions create preconditions for strengthening of inflationary pressures in the second quarter of 2017.

Unity in anticipation

Analysts polled almost unanimously (19 of 22) stated that the regulator in September will lower rates by 50 b.p. up to 10%. Only the experts of Alfa-Bank, RosEvroBank and Gazprombank believe that the regulator will leave its current level. After that, at the end of the year, according to 21 of 22 experts, the Central Bank will lower the rate by another 50 b.p. Alfa-Bank is the only Bank which is expected to keep rates in 2016 at the level of 10.5%.

TSB dramatically better bet not to reduce a maximum of 0.25%, because despite the slowdown in price growth inflation expectations remain high, ” says chief economist “PF Capital” Evgenie Nadorshin. But the Central Bank, usually taking his time and lowering interest rates could reach 0.5-1%”. In his opinion, the current decline in inflation is not a success in the struggle for stability in consumer prices. “Inflation slowed down mainly due to lower prices of agricultural products: this year was a good harvest thanks to good weather. However, we must understand that this short-term factor,” he says.

According to the consensus forecast for the dollar at the end of the year, the us currency will be traded for 60 RUB 65,2 RUB against on September 13. The forecast for the price of Brent crude oil as at the year end — RUB 52 per barrel versus 47,13 RUB per barrel on September 13.

Friday’s performance Nabiullina Sochi did not affect the rating of Credit Suisse from meetings of the Board of Directors of the Central Bank on September 16, says Bank analyst Alexey Pogorelov. “We believe that the recent data on the economy and the global economic situation has improved to such an extent that increase the likelihood of achieving a target inflation of 4% in 2017”, — he explained the position of the Bank. Drivers maintain further easing Pogorelov refers to a sharp improvement in inflation expectations, actual inflation data, limited the pressure from consumer demand and an enabling economic environment, including higher oil prices and capital inflows. The concern of the Central Bank about monetary policy in the context of transition to a structural surplus in the banking sector may postpone [further] reduction in the key rate, he said.

In his opinion, recent comments Nabiullina are of great importance for monetary policy easing, if considered in the long term, and probably less important for the rate decision on Friday. “We see them as an attempt of the Central Bank to adjust overly favourable expectations of households and the market regarding monetary policy in the future. Nevertheless, we note that these comments are hard and can lead to some overestimation of the prospects of reducing interest rates further,” he says.

“I don’t see a toughening of rhetoric — the position of the Bank remained unchanged. Possible target Friday performances — a little cool markets that have once again become overly aggressive in relation to the expected trajectory of rates, as evidenced by changes in the market” — echoes Dmitry Polevoy from ING.