Joy and disappointment, as market participants reacted to the new rate of the Central Bank

The decision of the Board of Directors of the Bank of Russia at the meeting on Friday, September 16, to reduce the key rate to 10% simultaneously pleased and disappointed market participants. The main surprise was the fact that the regulator stressed that its policy will remain moderately tight for quite a long time. Reduced rates up to 10% is sufficient to create the necessary conditions for the further reduction of inflation, therefore, I believe the Central Bank further cuts key interest rate may occur no earlier than the first or second quarter of 2017, announced the regulator.

“We first gave a clearer understanding of how we act in the coming months — said the head of the Central Bank Elvira Nabiullina. — We see some inflation risks that require a more restrained trajectory of inflation, so we made more predictable our actions for market participants. We wanted that number again to inform all that I want to achieve the goal of reducing inflation to 4%”.

TSB has actually promised that before the end of the year rate reductions will not” — said a senior economist at the investment Bank “Renaissance Capital” Oleg Kuzmin. According to the expert, in part, this may be related to the expected surplus of ruble liquidity, which in itself is at the end of the year will lead to some reduction in monetary conditions without the Central Bank will change rates. Structural surplus liquidity in the banking sector, according to forecasts of the Central Bank, can occur not earlier than 2017, if the spending from the Reserve Fund this year will amount to about 2.7 billion rubles.

As noted Nabiullina, the ability to reduce rates this year is unlikely. “As for rate cuts this year, based on our baseline forecast, this is an extremely unlikely scenario. Of course, some possibility exists, but only if a significant deviation from our baseline scenario for the better. This can happen, but in the baseline scenario, we do not see this possibility”, — she said.

In the accelerated growth of the Russian economy in the Central Bank, according to Friday’s report on monetary policy, I do not believe. According to forecasts of the regulator, Russia’s GDP in the third quarter of 2016 will be reduced by 0.3–0.7 percent from the same period last year. Investment in fixed capital will be reduced by 2.5–3.5%. Economic growth, according to the Central Bank, can be expected no earlier than 2017, but it will also be low — less than 1% in risky scenario laid a fall of GDP by 1-1,5%). Earlier, the Bank of Russia expected growth of GDP in 2017 to 1.1 to 1.4%.

Causes “uncertain recovery” as noted in the regulator’s report, in structural problems. “To entrepreneurs, investors have invested the financial resources that occurs in certain sectors of the economy, won including due to external economic environment, the necessary incentives for their investment decisions, to diversify their investments. This is due to the General certainty of the prospects, the economic prospects of product sales and so on and so forth, that is all what is called “investment climate”, — said Nabiullina.

“Reducing rates by 50 b.p. expected, but tough enough review — wrote in comments to Bloomberg chief economist of Bank “St.-Petersburg” Dmitry Shagardin. — The regulator believes that the problems of economic growth lie in the field of structural imbalances, not tight monetary policy.”

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Accordingly, to slow the pace of lending: the Central Bank expects that the growth of credit portfolio of banks of the Russian Federation in 2016 will amount to 4-6%. In the previous report, published in June, the Bank of Russia expected dynamics of this parameter at the level of 5-8%. In 2017, the credit growth will remain at the level of this year, the recovery in the market of banking loans, says the regulator, may not begin before 2018 credit portfolio may grow by 7-9%.

“We do not think that in the coming months, expect noticeable lending activity”, — said the Chairman of the management Board of UniCredit Bank Mikhail Alekseev, commenting on the statements of the regulator.

The latter, however, the Central Bank is inclined to consider as a positive factor, as too-rapid credit growth may create risks for financial stability. “Too rapid growth of consumer crediting can… create risks to financial stability, when there is an accumulation of the bladder and when the debt load of the population begins to actively grow,” — said Elvira Nabiullina. She noted that consumer crediting should grow at a rate close to the growth rate of incomes.

The latter came as a surprise to some market participants who had hoped for a more active reduction of interest rates from the controller. According to the consensus forecast, most analysts forecast a decline in rates before the end of the year to 9.5%. Two of the investment Bank, UBS and City, expected to reduce the key rate to 9%. “It’s amazing, but the Central Bank ruled out any further reduction in rates before the end of the year and clearly noted that in the near future should not expect lower rates in the market,” wrote in his review analysts at Sberbank CIB Vladimir Zubanov, Tom Levinson and Anton Struchenevsky. The experts noted that, given the rhetoric of the regulator, who believes that the moderately stringent conditions of monetary policy do not preclude economic activities, we should not expect improvements in the credit market. “Real corporate credit rates to remain extremely high at around 7%. This can slow or even delay the economic recovery, especially in the area of investment,” say analysts at the investment Bank.

“Our economy shows signs of recovery: stopped falling real incomes, growing demand. To support this recovery required a reduction in interest rates, the level of which is largely determined by the key rate”, — said head of marketing strategy and research at VTB24 Dmitry Lepetikov.

“The Central Bank is trying to convince everyone that the inflation target of 4% is achievable. This is important from the point of view of long-term credit resources, the cost of which is largely determined by expectations of inflation”, — said Oleg Kuzmin. Economist agree that greater rate reduction would spur economic growth in the country, however, this effect would be short-lived. “Banks could lower interest rates on short loans, but the market would have received a signal that the regulator is not willing to follow the paradigm of inflation. If banks and investors will not be confident that inflation will be low, we will never get long-term cheap financial resources. And related long-term economic growth,” — says the expert.

The first Deputy Chairman of Sovcombank Sergey Khotimsk believes that the Central Bank decision to cut its key interest rate practically will not affect cost of credit resources for the economy. “Over the past 12 months, the cost of medium-term loans fell by 3 percentage points, while the key rate by 1 p. p. the Market initially expected a decrease in the rate of the Central Bank, therefore, given the harsh statements of the Central Bank and the upcoming issue of Bank of Russia bonds (OBR) the rates will remain the same. This is good because we are given the macroeconomic situation now is not need fast credit growth. We are not ready for a rate of 8%. More credits needed, if the country has a high unemployment or a lot of spare capacity. In our case, should be slow to increase investment in the economy to obtain long-term growth, not inflation,” — says Sergey Khotimsk.

“In my opinion, the decision of the Central Bank to lower the rate dictated by the gradually increasing primarily of global risks. So, the Bank of Russia in their forecasts take into account at least one rate hike by the Federal reserve system (fed) in 2016, did not rule out that there may be two”, — said EDB chief economist Yaroslav Lissovolik. In his opinion, lower interest rates and, as a consequence, the acceleration of lending can be expected only in the first half of next year.