Analysts believe Russian Central Bank will retain key rate due to budgetary risks

MOSCOW, January 28. /TASS/. On Friday, January 29, the Russian Central Bank is going to maintain the key rate unchanged at 11% for the fourth consecutive time, according to all 15 analysts polled by TASS. In addition, the experts worsen the forecast for cheapening loans until the end of the year and increase inflation forecasts.

Since the beginning of the year, the ruble weakened against the dollar by 13%, Brent crude oil — by 15.4%. "Against last week’s backdrop of the ruble exchange rate volatility, the key rate should be increased to 13%," Nikolai Kondrashov, leading expert of the Center for Development at Higher School of Economics said. However, a week before the decision on the key rate, oil prices slightly rebounded, exporters began actively selling currency, which somewhat stabilized the Russian national currency and almost nullified the chances of a rate hike. According to Sberbank Chief Economist for Russia and CIS Julia Tseplyaeva, the regulator will not raise the rate, "unless something extraordinary happens, like population panic, attacks on banks." There is no such panic, she said.

Crisis once again at foreground

Maintaining financial stability and fiscal discipline is now the number one task for the Central Bank and the Government, which was stated by Central Bank Chief Elvira Nabiullina and Finance Minister Anton Siluanov at an unscheduled meeting of the Finance Ministry exactly one week before the meeting of the Board of Directors of the Central Bank. The Russian financial system faces several powerful challenges: increasing inflation expectations (16.4% against 15.8% before the previous meeting), threat of losing trillions of budget revenues due to falling oil prices, and the growing risks of a deepening recession (the IMF predicts decline of GDP by 1%, Economic Development Ministry predicts economic decline by 3.7% at oil price of $ 25 per barrel). In these difficult conditions, "the ability to survive is the ultimate test for maturity of the Central Bank and the Finance Ministry," Nabiullina said.

At the same time, Nabiullina made it clear that the Central Bank will have a hard time trying to keep inflation under control with a risky budgetary policy. She urged the Finance Ministry to maintain low budget deficit and debt level. In addition, the Central Bank needs to preserve the Reserve Fund and National Wealth Fund, as well as increase budget spending, which accelerates inflation. While amendments to the 2016 budget are not yet presented, the Central Bank faces significant fiscal risks. When there is some certainty with the budget, the Central Bank will be able to determine the vector of monetary policy better. "In the current situation economic structural imbalances are a source of inflation. There is a mismatch of the budget revenues and expenditures," Credit Suisse economist Alexey Pogorelov said.

The Central Bank has already made it clear that monetary policy could be tightened. "Inflation risks have recently increased. This generally means that the monetary policy will be a little tougher than expected," First Deputy Governor of the Bank of Russia Ksenia Yudaeva said in a recent interview with Bloomberg TV. The Central Bank’s stress scenario based on oil prices of $35 per barrel includes a possibility of increasing the key rate. The current oil prices are even below this level — at about $29 per barrel. However, the general line of the Central Bank policies is going to prevent it from increasing the rate. Since the beginning of last year, its policy was aimed at supporting the economic growth. The market and business are not prepared for the key rate increase.

Natalia Orlova, chief economist at Alfa-Bank agreed with the fiscal argument, however, she believes that its impact will manifest itself more in the second half of the year. "Whatever the situation with the budget cutting is going to be, the first half of the year will be tougher than the second. In the second half we will be approaching parliamentary elections. The first half of the year will be quite tough in terms of budget spending. Currently the problem of fiscal risks is not the most urgent, but it will be certainly central starting in the summer," she said.

Ruble not as crucial

Ironically, a strong weakening of the ruble is unlikely to become the Central Bank’s argument to increase the key rate. In December 2014, only a powerful wave of inflation against the background of the ruble devaluation became the reason for increasing the rate to 17%. Since the last meeting on the rate (December 11) the ruble weakened against the dollar from 69.2 rubles per dollar to 81.8 rubles per dollar. Last week Elvira Nabiullina told TASS that the ruble exchange rate was close to fundamentally justified. "There is no pressure on the ruble, just low oil prices, which lead to an increase in profitability of major ruble monetary market instruments," Dmitry Zavyalov, Head of Integrated risk at Ural Bank for Reconstruction and Development said.

However, in the context of new devaluation, the Central Bank could revise its optimistic forecast for target inflation of 4%, Natalia Shilova, Deputy Director of the Macroeconomic Forecasting Center at Binbank said. "In this situation, the main risk for the Central Bank is acceleration of inflation by the end of the year following higher exchange rate, which could jeopardize achieving the target inflation in 2017," she said.

According to the experts a cut of the key rate should not be expected until the second half of the year, until the effect of the weakening ruble will manifest a full impact on inflation. "We believe that the "transfer effect" of the ruble devaluation will be seen in the Q2. We forecast inflation at 9.2% at the end of the year, and it is highly possible that the weakening of inflationary risks will allow the Bank of Russia to renew the cycle of rate cuts," Head of Macro Research & Strategy at Gazprombank Gulnara Khaidarshina said.

Nikolai Kondrashov, expert at the National Research University Higher School of Economics estimates inflation at 9% at the end of the year, Nordea Bank analyst Dmitry Savchenko - 8.8%. The official forecast of the Central Bank is much lower — 5.5 - 6.5%. It is possible that the regulator will review it on Friday.

Uralsib Capital analyst Irina Lebedeva believes that the regulator could lower the rate only at stabilizing oil prices, which is not happening because of the "frantic growth of reserves" in the United States. "The relative stability of the ruble is still important for the Central Bank. There is no need to create additional risks for no reason," she said.

Business, like analysts, expect the key rate to remain at the same level. President of OPORA public association Alexander Kalinin said earlier in January, that reducing the key rate in January does not make much sense, "because December and January are traditionally the months of the biggest speculation in the foreign exchange market."

Anna Nesterova, member of the Presidium of the Council of Business Russia also does not expect changes in the key rate. "So far, I do not see the regulator being able to reduce the key rate in the near future. This will be possible in a long-term (2-3 months) stabilization of Brent crude oil price at the level above $32 per barrel. That is why, as long as there is uncertainty in the future of oil prices, the Central bank will leave the rate at the current level," she said.