MOSCOW, July 19. /TASS/. The Board of Directors of the Bank of Russia will raise the key rate by 50 basis points after a long pause at its meeting on Friday, July 21, from 7.5% to 8%, experts questioned by TASS said. Earlier the key rate remained unchanged since September 2022, or during six consecutive meetings.
Among the main arguments for growth of the rate are inflation dynamics and the aggravated proinflation factors, such as the weakening of the ruble’s exchange rate, an increase in consumer activity, the growing share of imports and budget spending rates. Specialists believe that it is necessary to start tightening the monetary policy now to bring inflation to the 4% target in 2024.
A rise by 50 basis points is the most probable at the upcoming meeting on July 21, though some companies polled by TASS do not rule out a greater increase in the rate - by 75-100 basis points. Economists also expect the regulator to provide a revised macroeconomic forecast, including on the rate dynamics. According to optimistic market expectations, the key rate in Russia will reach 8.25% by the end of the year, while pessimistic forecasts envision 9.5%.
The accelerating inflation rates in annual and monthly terms are in support of the key rate increase. In particular, last week the Bank of Russia released June price statistics, saying that prices accelerated by 0.52%, which is equal to 6.4% on an annualized basis, according to Tsifra Broker’s Daniil Bolotskikh. Maintained high lending rates, acceleration of consumer activity, as well as maintained high household inflation expectations (up by 0.9 percentage points in June to 11.1%) also act as a spur to tighten the monetary policy.
A notable weakening of the Russian national currency has also triggered inflation. "During the month since the latest meeting of the board of directors of the Bank of Russia the ruble lost almost 12% (to 91.7 rubles from 82.1 rubles per dollar)," Sergey Grishunin of the NRA rating service explained. With the rate remaining at the current level, the effect of its shift to prices in the following quarter will equal 4-8%, while inflation will reach the targeted level of 4%, the agency suggests.
An inventory decrease and the growing share of imports complicate the situation. That said, the statistics on business activity in May points to an active growth of demand, while the degree of utilization of labor resources and capacities is nearing natural limits. "Such a combination of factors substantially boosts inflation risks," Dmitry Kulikov, director of the ACRA Group of Sovereign Ratings and Macroeconomic Analysis, believes.
As the monetary policy influences the economy with a time lag (within 3-6 months, according to the Russian Central Bank’s estimations), for inflation to be brought to the 4% target in 2024 it is necessary to tighten the monetary policy even now, Vladislav Danilov at the Pervaya Asset Management noted. Meanwhile, experts share the view that on Friday the growth of the rate by 50 basis points is more probable than by 75-100 basis points as in the latter case the decision of the Bank of Russia may hinder the economic growth dynamics.
Moreover, "gradual normalization of budget spending rates, the cooling of the consumer lending market under the influence of regulatory hardening and the contribution of volatile components into inflation" will inhibit the Central Bank from aggressive tightening, Veles Capital’s Yury Kravchenko added. Meanwhile, the tightening of conditions on the market of interbank lending is already underway even without the regulator’s involvement, which may gradually affect the deposit and loan market, he said.
The smaller the rate increase is at the meeting on Friday, the more steps will be taken by the Central Bank in the future, specialists believe. For example, Freedom Finance Global expects the regulator to raise the key rate from one to three times in the second half of this year to 8.25-8.5%. Veles Capital projects that the key rate may reach 8.5-9.5% by the end of 2023, Russian Standard Bank - 8.75-9%, Tsifra Broker - 8.75-9%.
Finam’s experts believe that the key rate will hardly surpass 9% unless there are new shocks, while the National Rating Agency (NRA) expects it at 9.25-9.5% by the yearend.
In turn, banks will respond to tightening of the monetary policy by adjustment of their credit and deposit rates. "However, sudden movements are unlikely as the expectation of an increase in the cost of money in the economy has already been partially put into banking products," Head of Financial Markets Operations at Russian Standard Maxim Timoshenko said.
The Bank of Russia will not return to the key rate reduction earlier than the second half of 2024 as tackling inflation will be prior to it until the end of 2023, according to Freedom Finance Global’s Natalya Milchakova. "The key rate change is aimed at curbing the expansion of inflation expectations and ensuring price stability, which is kind of hard to do with the current volatility of the exchange rate. This is the reason for the increase, while the factor of tightened monetary policy a priori plays for the national currency, meaning for its strengthening," Mikhail Zeltser, a stock market expert at BCS World of Investments, added.
PSB Asset Management’s analysts expect the regulator to raise the rate by the yearend maximum by 25-50 basis points if the ruble strengthens at around the level of May or the first half of June "as inflation in stable components is slowing down, while the devaluation effect will go down in the event of the ruble’s strengthening." While with the rate remaining at the present level, the Central Bank may increase the key rate by 0.5-0.75 percentage points to 9-9.5%.
July forecasts by market insiders:
ACRA - 8%
BCS World of Investment - 8%
Veles Capital - 8%
NRA - 8.25%
PSB - 8%
Renaissance Capital - 8%
Russian Agricultural Bank - 8%
Russian Standard - 8%
Sovcombank - 8%
Tinkoff Investments - 8%
IVA Partners Investment Company - 8%
Alfa-Capital Management Company - 8%
Pervaya Asset Management - 8%
Finam - 8%
Tsifra Broker - 8%
Freedom Finance Global - 8%
SberCIB Investment Research - 8-8.5%.