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Russian experts elaborate on Central Bank's decision on key rate

June 14, 17:29 UTC+3 MOSCOW

The regulator might either keep it or reduce to 7%, experts predict

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© Sergei Bobylev/TASS

MOSCOW, June 14. /TASS/. The Board of Directors of the Russian Central Bank will face a difficult choice at a meeting on June 15 - to keep the key rate at the level of 7.25% per annum or to reduce it by 25 basis points to 7%, according to experts interviewed by TASS.

In their opinion, currently there are factors to keep the monetary policy unchanged, and to resume decreasing the key rate, which on April 27the regulator left at the same level. At the same time, the Central Bank drew attention to the uncertainty surrounding the further impact of the ruble's decline and geopolitical tensions on inflation expectations. The decision on the key rate at the end of April was made in sharply changed conditions. On April 6, the United States introduced new sanctions against Russia, bringing down Russian securities and weakening the ruble. 38 legal entities and individuals fell under the April US sanctions, including Russian officials and prominent businessmen.

Although the new US sanctions affected only certain companies, the US decision caused sharp growth of volatility in the entire Russian market. Thus, MOEX Russia and RTS indices the day after that fell by 10%.

The market split in half, reflecting on the Central Bank decision on June 15. The main arguments of analysts expecting to rate to be kept at the same level are inflation risks, which were mentioned in the Central Bank release following the April meeting. However, in addition to the depreciation of the ruble and geopolitical tensions in April, one more factor has now been added - a sharp surge of gasoline prices. Decline of the ruble against the dollar, which was 10% in April, has now stopped, but a sharp rise of gasoline prices can add to inflationary risks.

"We believe that the Central Bank will leave the rate unchanged, because two negative events have already occurred in recent months - weakening of the ruble and a sharp rise of gasoline prices. Therefore, given the Central Bank’s concerns, we believe that the regulator will be quite restrained," Raiffeisenbank analyst Stanislav Murashov said.

According to the Russia State Statistic Service (Rosstat), gasoline prices in Russia in May 2018 increased by 5.6% compared to April, and in annual terms - by 11.3%. Since the beginning of the year, gasoline has risen in price by 7.2%. The cost of diesel fuel in May increased by 5.2%. To stabilize the situation, on June 1 the government decided to reduce excises for gasoline and diesel fuel by 3,000 and 2,000 rubles per tonne, respectively, and canceled the decision to raise excises by 700 rubles from July 1.

According to Freedom Finance analyst Anastasia Sosnova, there are a number of reasons for the regulator to wait and see, so the Central Bank would not be able to neglect existing inflation risks and keep the rate at 7.25%.

According to Sosnova, the world market, despite the sanctions pressure, is currently relatively favorable, largely due to a 15% growth of oil prices in the Q2 of 2018. In turn, internal conditions are characterized by growing inflation risks, the expert noted.

"The main threat is growth of fuel prices on the domestic market, as well as weakening of the ruble due to increased geopolitical tensions between the US and Russia. Although, the current growth of fuel prices and the weakening of the ruble is unlikely to lead to serious growth of inflation expectations, these factors cannot be ignored, as well as the fact that in the second half of 2018 inflation is expected to accelerate," the analyst said.

Despite the emergence of new inflation risks that could deter the Central Bank from reducing the key rate in June, half of the interviewed experts believe that there are fundamental reasons for cutting the rate, while April ruble weakening and growth of gasoline prices are less significant factors with likely short-term impact.

"In our opinion, at the Friday meeting of the Central Bank the regulator can decide to reduce the rate to 7% and to transition to a neutral monetary policy. We believe that now the Central Bank has room for this maneuver - inflation stays at low levels at 2.4%, the ruble exchange rate demonstrates resistance to sanctions, economic growth remains rather modest and needs to be stimulated," chief analyst at B&N Bank Anton Pokatovich said.

In its release on the key rate published on April 27, the Central Bank noted that it would make decision on the key rate based on an assessment of inflation risks, inflation dynamics and economic development against the forecast. At the same time, First Deputy Governor of the Central Bank Ksenia Yudaeva said on June 6 that the dynamics of inflation in Russia creates a reserve for further reduction of the key rate.

"There are risks for every decision. However, we are waiting for the reduction of the key rate - 25 basis points as the main scenario. There are, of course, very large uncertainties, but there are prerequisites for a cut," Economist for Russia and the CIS at BofA Merrill Lynch Vladimir Osakovsky.

The market was divided in opinion regarding the decision of the Central Bank on June 15 due to the conflicting influence of external and internal factors. Internal factors - fundamental macroeconomic indicators - speak in favor of further reduction of the key rate, and external factors related to geopolitics and new inflationary risks for the ruble and gasoline prices require caution in the decision. That is why the Central Bank faces a choice - to lower the rate now or to wait and assess the impact of external risks.

"The market is divided, and this is due to two things: inflation is low, clearly lower than was originally suggested by the Central Bank," Director for the analysis of the financial markets and macroeconomics Alfa-Capital Vladimir Bragin said. According to him, external factors can hold the regulator back in lowering the key rate. In particular, the expert noted that the reduction of the key rate at the time of the global trend of weakening currencies of developing countries, including Russia, can bear risks.

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