The Bank of Russia will not reduce the rate and toughens its rhetoric

The Bank of Russia will not reduce the rate and toughens its rhetoric

The Bank of Russia may comment on the impact of the current situation of low oil prices on annual inflation targets, analysts say.

MOSCOW, 28 Jan. Ruble, updating the YTD historical lows against dollar and Euro, will not allow the Bank of Russia and this time to hold the promised easing of monetary policy, moreover, will force the regulator to toughen rhetoric, interviewed analysts.

The national currency, depreciating by 5%, creates preconditions for increase of consumer prices and inflationary expectations, which will stop the Central Bank from lowering the rates, despite the positive statistics on inflation in January, experts say. According to most economists, the monetary policy easing can be expected only in the summer.

A regular meeting of the Board of Directors of the Central Bank rate will be held on Friday, January 29. Now the key rate of the Central Bank is 11% — it has remained unchanged since August.

“Although we expect January inflation to the Central Bank estimates of 9.7-10% year-on-year if the oil price will be fixed at the current low level of around 30 dollars per barrel — actual inflation in the coming months should significantly exceed previous projections by the Central Bank due to unaccounted for additional carry-over effect of ruble depreciation on prices of a new decline,” — says the analyst of Raiffeisenbank Maria Pomelnikova.

Based on the data of Rosstat, inflation in Russia for January 25 has decreased almost 10% from 12.9% at the end of 2015.

Who is to blame and what’s next?

A week ago on January 21, the dollar jumped more than 5 rubles — almost to 86 rubles per dollar, and the Euro overcame the next high December 2014 at 93 rubles. Since the end of last week following a correction of the oil market, the ruble has resolved to the upside. So, now the dollar is trading at around 78 rubles, Euro — 85 rubles, whereas at the end of 2015 the dollar ended the day at around 73,59 ruble, Euro – ruble 80,43. At the end of 2014 courses accounted for 56 rubles, and 68.65 per ruble respectively.

The volatility in commodity and currency markets will be the main factor that will affect the decision of the regulator, says the analyst of Nordea Bank Dmitry Savchenko.

“Due to the decrease of the ruble in the beginning of the year inflationary risks increased significantly, the inflation expectations of the population also may deteriorate, which would likely force the Central Bank to leave monetary policy unchanged at the next meeting. The ruble is the main factor,” he said.

The head of the Central Bank Elvira Nabiullina said in December that the regulator might cut the rate on one of the next three meetings. Meanwhile, the first Chairman of the Central Bank Ksenia Yudaeva in mid-January pointed to increased inflation risks and that this will be taken into account when making decisions on the key rate.

According to the chief economist of the Eurasian development Bank (EDB) Yaroslav Lisovolik, the January data on inflation allow the Central Bank to lower the rate, but is hampered by a factor of instability in the financial markets. “Moreover, I expect that the Central Bank may toughen its rhetoric on inflation in a statement following the meeting of the Board of Directors. I think that more attention will be paid to inflationary risks in comparison with risks of a further slowdown in economic activity,” he said.

Agrees with him and the analyst of ROSBANK Eugene Koshelev: “In the last couple of meetings of the Central Bank spoke about the direction of the OST to mitigate. In the light of the changed commodity prices, the regulator will toughen the rhetoric and give the market a signal about the direction of its policy, noting only that the time to act will be according to the situation”.

Regulator toughens rhetoric

The market expects the regulator signals regarding the relevance of its baseline forecast in the current environment, focus of its policy. According to analysts, if earlier, the Bank of Russia was looking for a compromise between stimulating economic growth and maintaining stability in the financial markets, but now the importance of inflation comes to the fore.

As stated by Elvira on January 22, on the second day of the collapse of the ruble, through the coordinated actions of the Bank of Russia and Ministry of Finance in 2015 the situation in the Russian economy was under control, quickly adapting to the fall in oil prices, however, the new changes in the economic environment confronts monetary and fiscal policy challenges.

Since the beginning of summer 2014 to the end of 2015 oil prices have fallen more than tripled — from 115 to 36 dollars per barrel of Brent, and in 2016 already dropped below $ 30.

“All possible economic implications, the problems associated with the high rate secondary to the Central Bank, inflation for him is priority number one now. The Russian economy has been shifting from serious cyclical downturn to a structural, linked with the crisis in commodity markets, respectively, this situation requires higher nominal interest rates. This rule most likely will be guided by the regulator,” says the analyst of ROSBANK.

As was stated by the head of Department of monetary policy of the Central Bank Igor Dmitriev in mid-January, the probability of a risk scenario slightly increased, but significant deviations from the baseline scenario until it happens, adding that in risky scenarios possible tightening of monetary policy. Experts expect statements from the regulator on the status of CB forecasts.

The baseline scenario of the OST focuses on the price of oil during the 2016-2018 in the region of 50 dollars per barrel, at which annual inflation drops to 5.5-6.5% in late 2016 and to the target of 4% in 2017. Risk scenario with oil priced at 35 dollars assumes inflation at 7% by year-end.

“We expect that in the new press release of the Central Bank may comment on how in the opinion of the regulator will affect the current situation of low oil prices on annual inflation targets, whether the anti-inflationary effect of the economic slowdown offset the effect of the devaluation of course whether the decline in oil prices long-lasting. Depends on the policy change by the Central Bank in the near future. If the Central Bank recognizes that the situation develops under the negative scenario, the conditions for rate cuts unlikely before the end of the year,” says Pomelnikova.

Koshelev also hoping for easing of monetary policy, will be implemented if the risk scenario in the baseline scenario expects rates to 9% by the end of the year.

“The basic message we expect from the regulator which they base the script is now ready to consider. If they are willing to consider the $ 35 per barrel as the base scenario, it is a tougher path at a rate…. While we expect a rate cut before the end of the year, but if we assume that oil will be $ 30 all the time during the year, the chances of a softening prep to the end of the year less than 50%. For the baseline scenario with average annual prices in 50 dollars per barrel in the second half of the year the rate will be reduced by 200 basis points (2 percentage points),” notes the analyst of ROSBANK.

Rates can be lowered only in the summer

Director of Department of financial markets of Asian-Pacific Bank Oleg Deselnicu not waiting for a rate cut on 29 January, but believes that to resume the monetary policy easing by the Central Bank only by the end of the second quarter.

The head of the Treasury Department SDM-Bank Edward Lushin also expects a rate cut only in the summer, believes that the grounds for a rate hike yet. “The rate reduction may occur later in the summer of 2016. While there is no evidence about threatening inflation and a sharp resurgence of inflationary expectations, the Central Bank will not raise its key interest rate, considering the current devaluation as fundamentally justified by the current situation on world commodity markets,” he said.

More optimistic is looking on the situation the chief economist of Merrill Lynch, the investment division of Bank of America, for Russia and the CIS Vladimir Osakovsky. “We expect the Central Bank will leave the rate without changes, but there is a chance that the Central Bank will be inclined to lower rates. Inflation slows: now released data for January. On the next one or two meetings, probably, the regulator can be reduced by 100 basis points (1 percentage point),” said he.