Expert: “This measure is unlikely to save the ruble from falling”
The Central Bank, which traditionally strives for cautious, streamlined formulations, has not been so categorical in its announcements regarding the key rate for a long time . The fact that it can be increased already at the next (July 21) meeting of the Board of Directors of the regulator, said the Deputy Chairman of the Central Bank Alexei Zabotkin. There are two reasons for this unambiguity, and they are interrelated — the growth of inflation and the weakening of the ruble.
“The 7.5% rate over the period was in line with our understanding, including our forecast, of what is required to stabilize inflation near 4% on our targets. So far the data has confirmed this. But we see that the balance of risks is shifting towards the pro-inflationary side,” Zabotkin explained. He pointed to such factors as the expansion of domestic demand from the two sectors — private and public, as well as the acceleration of lending in recent months (in May, the volume of loans amounted to a record 1.41 trillion rubles).
Recall that the rate has been kept at the level of 7.5% per annum since September last year. By the July meeting of the Central Bank, the pause in its dynamics will become the longest in Russian history. Prior to this, for more than six months, the rate was kept at one level (11%) for 10 months — from August 2015 to June 2016. As for annual inflation, in May this year it accelerated to 2.51% compared to April (2.31%). On a monthly basis, consumer prices increased by 0.31%. In addition to the pro-inflationary risks mentioned by Zabotkin, there are a number of others. First of all, these are the high (3.4 trillion rubles) budget deficit, the growth of government spending, the deterioration in the terms of foreign trade, the complication of production and logistics chains, leading to higher prices for imported goods.
The situation with the announced rate correction has a second, no less important side, which is not advertised by the regulator, but which is discussed by independent experts. We are talking about the ruble, frankly weakening in recent years. On Monday, June 26, the exchange rate of the dollar exceeded 87 rubles — for the first time since the end of March 2022, the euro broke through the mark of 94.
“This is the essence of events,” said Igor Nikolaev, chief researcher at the Institute of Economics of the Russian Academy of Sciences. — The Central Bank did not expect that the Russian currency would sink so deeply. According to the medium-term forecast of the Central Bank, by the end of the year the exchange rate was to be 76.8 per dollar. Today there is no reason to strengthen it. Accordingly, this formidable trend must somehow be responded to, especially since consumer prices and inflationary risks have begun to grow. However, raising the rate, even by 0.25 basis points, is not an easy step anyway: the market will see it as an unkind sign, indicating a fundamental change in monetary policy, a turn in the opposite direction from economic growth. Moreover, this measure is unlikely to save the ruble: its exchange rate will continue to weaken under the pressure of powerful fundamental factors.”
Not only is it bad that commercial loans for enterprises will become more expensive (accordingly, private investors will invest less in the development of the economy), this is only part of the whole picture. The overall production activity is influenced by many factors — geopolitical uncertainty, high tax burden, and the lack of own working capital of enterprises. As for the expected increase in rates on bank deposits, there will be little benefit for the population here, Nikolaev notes: these small percentages will be covered by inflation.
“For the first time, the financial authorities have explicitly acknowledged that the weakening ruble is making a serious contribution to inflation,” says financial analyst Sergei Drozdov. — Of course, the Central Bank is interested in its strengthening, which cannot be said about the position of the Ministry of Finance. It is clear why the regulator plans to raise the key rate (apparently to 7.75% or 8%), but it remains a mystery to me how this will help the cause. A higher rate may work against the background of economic and geopolitical stability, but not in the conditions in which we are today. In general, inflation is determined by a combination of circumstances, including the exchange rate of the ruble. Since there is no way to influence the situation with the ruble, it was decided to “go from the other side” — to make enterprises take fewer loans (due to the high cost) and achieve a reduction in the money supply, which has grown significantly over the past six months. Of course, business activity will suffer, the economy will slow down. And the price tags on store shelves will not stop growing — they don't care what the key rate is in the country.