The market had forecast, in terms of reduction of the key rate of the Central Bank

The Board of Directors of the Bank of Russia at the regular meeting to hold its key rate unchanged at 10% per annum, agree the vast majority of respondents Bank analysts and economists. Despite the acceptable to the Bank, the actual rate of inflation slowdown in December and January, the inflation expectations are too high. The Central Bank will follow their evolution until the end of March, when the next meeting before making the decision to change rates. In addition, in January there were factors that were not taken into account in the decision-making process at the level of the interest rate — the prospect of foreign exchange intervention.

Inflation expectations

The regulator has repeatedly stated that he is not only the achievement of the inflation target (4% at the end of 2017), but also anchoring it to this level. This, in turn, requires a stable decrease in inflation expectations of the population and, accordingly, carrying out moderately rigid monetary policy for a long time.

Whereas the actual growth rate of consumer prices continues to slow (according to Rosstat as of January 30, inflation fell to 5.1% yoy against 5.3% a week earlier and 5.4% by the end of 2016), inflation expectations are still significantly higher than the actual figures. According to Bank of Russia estimates, based on data of the December opinion poll the “Old,” inflation expectations for 2017 are in the range of 5.2% to 12%. Direct assessment of the “Old” (median) expected inflation for the next 12 months, calculated from the responses to the question about the level of inflation was 12.4%. “In 2016 in the dynamics of inflation expectations was observed downward trend, but their level remains high and exceeds mid-term target of the Bank of Russia on inflation of 4%, which creates proinflationary risks in the economy,” explained the Central Bank in December.

The Bank of Russia focuses on this indicator, as it gives the inertia of inflation, says senior analyst of the research group and prediction of the rating Agency ACRES Dmitry Kulikov.

According to a leading analyst PSB Andrey Nasonov, the Central Bank “will take a break to confirm the trend in the decline of inflationary expectations and will not be until to reduce the key rate”. “In comments following the meeting of the Board of Directors of the Bank of Russia is likely to leave the phrase that the risks of not achieving the inflation level of 4%, and at the moment they are primarily related to inertia in inflation expectations and a decrease in the propensity to save of households,” he says.

This position was echoed by an analyst of UniCredit Bank Anna Bogdyukevich. “Following the December meeting, the Central Bank has signaled that, despite a further slowdown in price growth remaining at a fairly high level, the inflation expectations do not allow to go for easing of monetary policy,” she said. She added that since the December meeting, the economic situation has changed slightly: “Indicators of the real sector continued to demonstrate mixed dynamics. The trend of slowing inflation is likely to continue in January, but the risks to achieve the established Central Bank target of 4% by the end of the current year are saved”.

Problem intervention

In addition to inflation expectations, lowering the key rate in February and hinder the coming currency intervention, consider all the surveyed analysts. The mechanism for purchasing foreign currencies by the Ministry of Finance (through the Bank), which begins operating in February, is still not fully understood by the markets, says Kulikov of an ACRE. “Given that a large number of news from regulators is perceived, generally, as the growth of the level of risks, the Central Bank will probably try not to give additional reasons for the emergence of incentives to short-term saving in foreign currency”, — he explained.

In addition, the intervention may provoke the weakening of the ruble, and it is unknown how this will affect inflation, adds chief economist at Sberbank CIB Anton Struchenevsky and chief economist of Bank of America (BofA) in Russia and the CIS Vladimir Osakovsky. “In addition to buy the currency, the Central Bank will have to resort to the additional emission of rubles. In this case, the regulator will have to resort to some action to sterilize excess money stock. This increases the uncertainty regarding the pace of inflation in the future,” said Struchenevsky.

Comments of the Central Bank following the meeting are likely to include a description of its policy interventions and their possible implications for the currency market, I believe Struchenevsky, Osakovsky and member of the management Board, head of investment business of the Bank “Opening” Konstantin Tserazov.

Another factor that plays in favor of maintaining the key rate at the current level, — carrying out one-off payments to pensioners in January and the regular indexation of pensions since February, adds the head of the Center for macroeconomic analysis of Alfa-Bank Natalia Orlova. “The Central Bank must first look at the inflationary effect of these measures before taking the decision to reduce the rate,” she says.

Considering all the above factors views on the possible timing of a reduction in the key rate were divided equally.

Attention to the second quarter

Struchenevsky believes that the Central Bank may begin to reduce the rate in the second quarter, when it becomes clear the impact on inflation of exchange market interventions and the additional emission of rubles, and bring it to the end of the year to 8.5%. If the Ministry of Finance will carry out their plans on currency intervention, the dollar, according to Sberbank CIB, will cost by the end of the year, about 64 RUB, oil is around $55 per barrel.

Chief analyst at VTB24 Stanislav Kleshchev also believes that before the end of the year the key rate may be lowered by 150 basis points to 8.5% per annum. “Successful fixing inflation expectations allow the Central Bank more confidence to ease policy in the second half of 2017,” — said mites.

The scenario of a rate cut in the second quarter of adheres and chief analyst at Danske Bank Vladimir miklashevskii. His forecast for the end of the year — 8%. Initially the Bank had forecast the rate to the end of 2017 at 7%, but changed the forecast after the announcement of the upcoming intervention of the Ministry of Finance.

A crash scenario

To decrease in March tend those who expects continued stability in the foreign exchange market after the beginning of intervention of the Ministry of Finance.

Osakovskiy sure that the Central Bank has grounds for a rate cut already in March by 0.5 percentage points, to 9.5%.

According to Vladimir Bragin from “Alfa-Capital”, Central Bank leave for itself possibility of a rate cut in the first quarter. “In favor of this several factors, including the strengthening ruble, the slowdown in inflation and the absence until the revival of consumer demand, despite growth in real wages”.

In favor operative reduction of interest rates, in his opinion, is the fact that already high real interest rates negatively affect economic growth, although Central Bank is not directly responsible for the economy, he probably still listens to the opinion of the financial-economic bloc of the government. In addition, judging by the latest statements of officials, the authorities are concerned about the excessive strengthening of the ruble. To weaken the exchange rate of the Russian currency can either through intervention, as already announced, either through a rate cut, he said.

Nasonov believed that the reduction of the key rate by 50 b.p. will occur at the meeting of March 24, barring external shocks. “Low inflation for 2016 should make a positive contribution to the perception of its level of population, and inflation expectations in coming months will decline, which will allow the Central Bank to resume the easing cycle DCT”, — he explained.

Dissenting opinion

Of analysts polled only one — Natalia Orlova from Alfa-Bank expects that rate in 2017 will remain at 10%. In her opinion, at the moment it is the most likely scenario. “This will be the case if the fed in March will move to raise interest rates, and inflationary pressures in Russia will cease to decline with the gradual recovery of the economy,” she says.