The Bank of Russia has moved to a hawkish tone

The Bank of Russia has moved to a hawkish tone

Analysts believe that the decision of the Central Bank rate was expected, but a fundamental change in the rhetoric of the regulator somewhat surprised economists.

MOSCOW, 29 Jan. The Bank of Russia on Friday once again kept its benchmark rate at 11% per annum, however, abruptly changed the tone of its statement, adding in a press release on a possible tightening of monetary policy.

Interviewed analysts believe that the decision of the Central Bank rate was expected, but a fundamental change in the rhetoric of the regulator somewhat surprised economists. In their view, a sharp change of “mood” in the release means that further steps by the Bank of Russia is forced to put in dependence on external conditions, and in fact from changes in oil prices.

On Friday, the first meeting of the Board of Directors of the Central Bank on interest rate policy this year. Last year the regulator to gradually cut the rate, however, at the meeting of 11 September for the first time since the beginning of the year has left it unchanged since August, she “stiffened” at 11% per annum. The latest decision of the Central Bank the market is not surprised, slightly affecting the dynamics of the ruble on Friday.

“The CBR was expected left key rate unchanged at 11%, but this is almost the only thing remaining from the previous review. The tone of the statement was much more hawkish — previously the regulator said the possibility of policy easing in the next three meetings. This phrase was deleted in the release in connection with increasing inflationary risks,” said ING’s chief analyst Dmitry Polevoy.

The rhetoric of the Central Bank may change

In mid January the head of Department of monetary policy of the Central Bank Igor Dmitriev have warned that the Bank of Russia to tighten monetary policy in case of realization of a risk scenario with oil price in 2016 to $ 35 per barrel. However, in this case, the tightening will not necessarily mean an increase in rates, he explained then. According to Dmitriev, under certain conditions, the keeping rates unchanged may be stricter.

However, economists do not exclude “pivot” policy of the Central Bank — the resumption of the “dovish” rhetoric in the case of a significant improvement in oil prices and the ruble otvoevyvaya positions lost since the beginning of the year.

“While the Central Bank has chosen a very cautious and more assertive position, but it still does not completely rule out the possibility that if the situation has markedly improved with the oil price and the ruble, and the Central Bank rhetoric may change,” says Polevoy from ING.

However, there are risks and that the Central Bank in the continuation of the negative tendencies that are observed now can quickly raise its key interest rate, experts warn.

“Although explicitly in the press release is not indicated, while maintaining low oil prices easing should not be expected, reflecting the amplification of the fall in GDP due to unfavorable dynamics of oil prices, we believe, means that the current state of the economy closer to a negative scenario of the Central Bank, where inflation risks are elevated,” believes macroanalytic Raiffeisenbank Maria Pomelnikova.

Oil under pressure

The Bank of Russia in its report, has not spared the situation on the world oil market, explaining that when deciding on the key rate was taken into account the situation in the Russian economy, where increased risks of a continued decline due to lower oil prices. Also, the regulator took into account the factors of the high debt burden of Russian companies and take into account interest rate risks for banks and their borrowers.

Most of 2015 the world oil market declined, while from may to the end of the year the price of a barrel of Brent oil declined by 47% and has dropped into the area 36 dollars per barrel. In January oil refreshed multi-year lows, falling in the area of $ 27 per barrel Brent, and then rebounded to $ 31 dollar. By the end of January the price began to win back lost positions, and its cost exceeded $ 35 per barrel.

In the baseline scenario of the Central Bank, implying an average annual oil price of 50 dollars per barrel, the decline of the Russian economy in 2016 is expected to be 0.5-1%. Under the stress scenario, with an average annual price of oil at 35 dollars per barrel, the fall in GDP could be around 2-3%.

“What happened under the influence of the fall in oil prices, the weakening of the ruble has a Pro-inflationary pressure and promotes the growth of inflationary expectations, despite a slowdown in annual inflation,” the Central Bank said in a release. According to the estimates of the regulator, the oil price in the period of 2016-2017 years will likely be lower than previously assumed in the baseline scenario.

The expectations of the regulator, the floating rate will partially offset the negative impact on the economy of low energy prices. The Bank of Russia has warned that it will require further adaptation of the balance of payments and economy to lower the level of world prices for main Russian exports.

“First of all, our attention is drawn to the fact that CB binds the current higher rate of growth of prices and increase of risks of acceleration of inflation with a new wave of lower oil prices. In this case, while the regulator does not assess the likely magnitude of increase of inflation because that has already happened decline in oil prices. This is not surprising given the sharp decline in oil prices, there are only only one month,” notes Palenikova from Raiffeisenbank.

The Central Bank has remained faithful to the main goal

Despite the change of rhetoric, the Bank of Russia does not refuse from its inflation target to 4% at the end of 2017, albeit differently placed targets: if the December release, the regulator said about the expected decrease in annual inflation at the end of 2016 to about 6%, in January said its level in January 2017 — less than 7%.

“We believe it is important that the Central Bank emphasizes the immutability of its forecasts for inflation and the current price dynamics still point — 4 percent in 2017, noting only that increased risks of deviation from the target at the end of 2017. We note that the Central Bank sees the possibility of achieving the target inflation rate only in the case of reducing inflationary expectations, otherwise, inflation is planned to be achieved through measures of monetary policy,” said Pomelnikova.

The next meeting of the Board of Directors of the Bank Russia, which will address the issue of the level of the key rate, scheduled for March 18, 2016.