The consensus forecast, the Central Bank will keep its key rate at 7.25% because of the sanctions

MOSCOW, April 26. /TASS/. The Bank of Russia at the next meeting of the Board of Directors on April 27 will keep the key rate at the current level of 7.25%, is believed to experts interviewed by TASS.

In their view, after the introduction of the new US anti-Russian sanctions, the regulator will take a pause in monetary policy easing and would not change the bet level so as not to add volatility to the market, respond to new restrictions by the fall of the ruble, stocks and bonds.

However, I agree with this opinion, not all analysts: some of them believe that the Central Bank could lower its key rate by 25 b. p., because fundamentally, the situation has not changed: inflation remains low and inflation expectations continue to decline.

New sanctions

USA imposed new sanctions against Russia on 6 April. In the “black list” includes 38 legal entities and individuals, including Russian officials and big businessmen. More likely the us restrictions affected the Oleg Deripaska – from 12 private companies, placed under sanctions, eight belong to him, including the public company En+ and UC Rusal.

Although the new us sanctions have affected only certain companies, the US decision has caused a sharp increase in volatility on the Russian market. On the first working day after the imposition of sanctions – April 9 – Russian indexes of RTS and Mosberg fell by 10%, and in the week after the announcement of the new restrictions the U.S. the ruble fell below 65 rubles to the dollar to 80 rubles per Euro.

After the market pared some losses, but the uncertainty has forced some companies to delay the market entry of capital, not only on international but also on the inside. The savings Bank and group “PEAK” has shifted the placement of rouble bonds on 15 billion rubles and 14 billion rubles. respectively, the Russian IT holding IBS Group has postponed indefinitely an initial public offering (IPO).

The most likely scenario

Most analysts expect that the regulator will not go on further reduction of the key rate on April 27 and will take a break after the bright market reaction to the introduction of new restrictions from the US. The ruble fell against the dollar and Euro, from April 9 to 11, 12 to 13% – to the lowest level in 2016, indices Mosberg and the RTS fell by 8-11%, OFZ and Eurobonds also became cheaper by 1 – 3 percentage points per day.

Immediately after the imposition of U.S. sanctions on the head of the Central Bank Elvira Nabiullina said that he sees threats to financial stability, and the head of the Ministry Maxim Oreshkin – that the market managed to successfully deal with the “good test” in the form of sanctions.

Analysts recognize that the market is really more stable than during the crisis in late 2014 – early 2015: the ruble is already on 12 April played half of the reduction, and today continues to consolidate near the reached levels.

Chief economist for Russia and CIS IC “Renaissance Capital” Oleg Kuzmin expect that the Central Bank will keep its key rate at 7.25%, while mitigating the “geopolitical noise” will continue rate cuts in June and by the end of the current year the indicator can be reduced to 6.75%.

“We believe that the Central Bank should pause in reducing rates, to allow a return to normal market volatility and to better understand how currency depreciation affects the inflation forecasts and inflation expectations. Obviously, now is not the time to change rates, when the geopolitical headlines are changing overnight, and nobody knows whether they soften or harden in the next few weeks” – says Kuzmin in the analytical review.

“I am inclined to think that the Bank rate will not reduce this time, and the reason is very simple: the market is quite volatile right now – the ruble and stock market and bond market, in principle, too. I think that the Central Bank will refrain from additional source of uncertainty or occasions for regular oscillations, because the current situation is not very favorable for inflationary expectations. Here, rather, the Central Bank was careful, because this situation may slightly increase inflation expectations and raise the risks of failure to meet targets on inflation”, – says Director for analysis of financial markets and macroeconomics UK “Alfa-Capital” Vladimir Bragin.

Thus, according to experts, the market’s reaction to the decision of the Central Bank at a rate to be moderate. Analysts of Bank believe that the domestic foreign exchange market will react neutrally to the results of the meeting of the Central Bank on 27 April, and the fed’s rhetoric will be very discreet. “Given the current external environment, we believe that the rate at this meeting will remain at the level of 7.25%. The result is supported by the high levels of oil prices, the expected movement of the ruble in the range is 61.3 – 62.6 per per dollar”, – predicts the Bank.

“The Central Bank decision is likely to be equipped with a fairly mild comment. All basically understand that the rate of the Central Bank aimed at easing monetary policy, just CBA doing it carefully, once again trying the market not to irritate and not to create additional sources of volatility,” agree Bragin.

Stimulus is still possible

Expectations of continued key rate, according to most experts, due to sanctions. However, the fundamental factors remain the same. For example, annual inflation in the week of 23 April, remains at a low level – 2.3%, and inflation expectations continue to decline. A study of the Central Bank showed that the median expected inflation for the year ahead in April fell to 7.8% against 8.5% in March.

“The recent surge in market volatility has led to a significant shift in expectations, and at the moment most of economists surveyed by Bloomberg expect this Friday the Central Bank rate will be left unchanged. We, however, believe that this view is not supported by any economic statistics or statements of the Bank of Russia, and expected that the rate will be reduced by 25 b. p., having thus, 7%”, – considers the economist “VTB the Capital” in Russia and the CIS Alexander Isakov.

Thus the real interest rate (the key rate minus inflation), according to experts, remains high, which also speaks in favor of continuing the normalization of monetary policy. In addition, the results of the previous meeting of the Board of Directors of the Central Bank at the rate of 23 March Nabiullina said that the Central Bank sees the potential to reduce in the future.

“I certainly understand that the probability of a reduction in the key rate is, because inflation is very low and in fact, the high real interest rate – is not good for the economy. Especially in terms of sanctions and external economic pressure, it is clear that domestic settings it would be good to make the best. The wage rate is too high, so the normalization of monetary policy is in line with what I have to do the regulator in the current environment. But it turns out contradictory argument. Most likely, the Central Bank will not cut rates, but a small probability of lower leaves – 15%, maybe 20%,” says Bragin.

No reason to raise rates

The reaction of the Russian market for new sanctions has led to increased speculation about a possible rate hike. In particular, the volatility of the ruble after the introduction of new U.S. sanctions on 6 April jumped more than 1.5 times. So, for example, the rate of three-month volatility of the ruble increased from 9,9575% on 6 April to 16,575% on April 11. In addition, the Russian 5-year CDS (credit default swap, credit default swap), reflecting the risk and the cost of insurance sovereign bonds against default, rose 11 APR 29 percentage points to 149,8%.

The head of the Department of monetary policy of the Central Bank Igor Dmitriev told journalists that the restrictions on raising the key interest rate depending on the inflation forecast is the de facto removed. Later the first Deputy Chairman of the Central Bank Ksenia Yudaeva noted that the inflation Outlook might be revised up, although it will remain with high probability in the range of 3-4%.

“Definitely, the monetary authorities are closely monitoring the volatility of the exchange rate, the growth of which, given the weight of imports in retail turnover, may including to have a pronounced negative effect on inflation and inflationary expectations of the population”, – said the Director of Analytics of Bank “Opening” Dmitry Harlampiev.

However, the reason for the increase in the key rate is not, analysts say. The market quickly adapted to the new sanctions. “If the situation is out of control, let’s start some sort of currency crisis or severe weakening of the ruble, I think that the Central Bank may rate increase. It is his right, moreover, it is his duty to do under certain conditions. But now there is absolutely no need,” – said Bragin.

“This is not the situation in 2014, when it was a powerful flight of capital, and then, indeed, the situation had to be stabilized to eliminate the speculative movement against the ruble. In principle, similarly, there are other regulators of developing countries in similar situations. Now this makes no sense whatsoever,” he explains.

The Bank responded quickly to the volatility of the ruble, temporarily suspending purchases of foreign currency for the Ministry of Finance and stating that it has the necessary tools to stabilize the foreign exchange market. “However, while the need to use them there, as risks to financial stability de facto do not exist,” – says Harlampiev.

Forecasts of the level of rates

  • B & n – of 7.25%;
  • “Renaissance Capital” – 7,25%;
  • Citi – 7.25 per cent;
  • Sberbank CIB – 7.25 per cent;
  • ING – of 7.25%;
  • “FC Opening” – 7,25%;
  • JPMorgan – of 7.25%;
  • Morgan Stanley – 7.25 Per Cent;
  • FG BKS – 7.25 PER CENT;
  • “VTB Capital” – 7,00%.