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Consensus forecast: Russian Central Bank not to rescue ruble by raising key rate

September 10, 2015, 18:37 UTC+3 MOSCOW
The financial regulator will be forced to cease cutting the key rate due to deepening recession in the Russian economy, experts say, adding that it's a case of Hobson's choice for the Central Bank
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© Artyom Korotayev/TASS

MOSCOW, September 10. /TASS/. The Bank of Russia will keep its key interest rate unchanged at 11% per annum at the Board of Directors meeting on Friday, the majority of analysts polled by TASS said.

The financial regulator will be forced to cease cutting the key rate due to deepening recession in the Russian economy (devaluation of the ruble and possibility of raising interest rates by the US Federal Reserve), experts say, adding that it's a case of Hobson's choice for the Central Bank.

Russian officials, bankers and businessmen have traditionally been calling for the Central Bank before its Board of Directors meeting to cut the rate to pre-crisis single-digits. According to Presidential aide Andrey Belousov, the fact in itself will attract investments into the country while Economic Development Minister Aleksey Ulyukayev sees room for cutting the key rate.

Inflation threat

The Bank of Russia relies on inflation targeting policy when taking decisions on key rate. The regulator may only slash the rate amid stable consumer prices and moderate inflationary expectations. However, as of now annual inflation in Russia hasn’t changed significantly — according to data provided by state statistics service Rosstat as of September 7, inflation stood at 15.6% versus 15.8% as of end-July. Trend inflation calculated by the Central Bank rose to 11.6% in July, a 0.1% increase compared with June.

Another strong factor to impact inflation was 20% devaluation of the ruble in August. The ruble’s official exchange rate to the dollar dropped from 58.99 rubles to 68.79 rubles per dollar in 6 weeks. According to the Finance Ministry, devaluation of the ruble triggered inflation most of all in August and will extend its impact in September. In its turn, falling oil prices put pressure on the ruble: Brent crude declined from $52.85 per barrel to $47.63 per barrel in the same period.

"As it targets inflation the Central Bank could have raised the rate amid the ruble’s current exchange rate and August inflation," head of macroeconomic research at Russian top lender Sberbank Julia Tsepliaeva said, adding though the regulator is unlikely to take this step. Another important signal for the Bank of Russia is a serious possibility of the US Reserve Fund to raise its interest rate, which "may be followed by a new wave of oil prices plunge and thus a new wave of currency devaluation, on emerging markets in the first place," the expert said. Tsepliaeva added that the US Federal Reserve rate will most probably be raised in October rather than in September, which means the Bank of Russia has room for maneuver.

Chief analyst at Nordea Bank Dmitry Savchenko sticks to a different view. "I do not think the rate should be raised despite the ruble’s devaluation within the last month. Inflation will still be declining and will reach single-digits by the start of next year. That’s why the Central Bank should not be eagerly rescuing the ruble," he said.

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