How the regulator's decision will affect the exchange rate and citizens' wallets
The Central Bank of the Russian Federation for the first time in 15 months increased the key rate by 1% to 8.5%. The last time the indicator was raised on February 28 last year to offset the consequences of the imposition of sanctions and prevent a sharp collapse of the ruble. After that, until July last year, the Bank of Russia only reduced the key rate, and then, in September 2022, fixed it at 7.5% and left it unchanged for six meetings of the board of directors in a row. Financial market experts told MK about how the change in the position of the Central Bank of the Russian Federation will affect the ruble exchange rate and the wallet of Russians.
“The decision of the Board of Directors of the Central Bank was expected: it was dictated by the current acceleration of inflation. Rosstat reported that in June 2023 annual inflation increased to 3.25% compared to 2.51% in May. Taking into account seasonal factors, price growth accelerated to 0.4% over the month. This information is contained in the review of the Ministry of Economic Development on the price situation in the country. The regulator expressed concern about the acceleration of inflation, the weakening of the ruble and the possible overheating of the economy even at previous meetings. So his decision today is quite logical.
The ruble may react to the rate increase with a small increase, but it is unlikely to be able to stay in the black for a long time. The high rate attracts foreign investment, but the assets of non-residents are frozen. The currency and stock markets are not the same as they were before February 24 last year. It is highly likely that after the meeting of the Bank of Russia and the end of the tax period, the dollar and euro exchange rates will renew their recent highs.
As for the Russian economy as a whole, a rate increase could help reduce inflationary pressures and mitigate possible overheating.”
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“The growth of the key rate should be followed by the rates of the entire credit and deposit market, that is, the profitability of deposits and the cost of loans will increase, and the prices of federal loan bonds (OFZ) may still sink. So, at the beginning of July, the maximum annual rate on deposits in rubles in the top 10 banks was 7.82%, and after the growth of the key rate of the Central Bank on July 21, already in August, deposit rates can easily go beyond 8%. But loans are usually more sensitive to changes in rates, and there the percentage increase can be higher.
In itself, the rise in the cost of credit resources leads to a slowdown in business and consumer activity, a decrease in the efficiency of business processes, but in the current not entirely favorable environment, one has to think more about price stability in the economy, otherwise inflation will simply nullify all the macroeconomic gains of the last year.
Moreover, the devaluation of the ruble itself speaks in favor of raising the key rate — the so-called effect of imported inflation plays a role here, and, given the structure of our economy and the high share of imports in it, there will certainly be a price hike. Thus, by raising the rate, the Central Bank can also solve the problem of reducing the hype in the foreign exchange market. According to our estimates, after Friday's meeting, the process of a more active recovery of the ruble may be launched and by autumn the dollar exchange rate may sink from the current 90-91 to 85-83.5 rubles.
“Inflationary risks are aggravated due to the following main factors: increased budget payments to the population, higher wages due to a shortage in the labor market, growth in demand due to the aggressive expansion of consumer credit, rising import prices due to the devaluation of the ruble .
In theory, an increase in the key rate helps strengthen the national currency, but since today's increase is quite small, it will not have a significant impact on the ruble exchange rate. The ruble is significantly affected by the relatively stable process of declining current account balance, as well as the outflow of capital from Russia.
The increase in the key rate contributes to the weakening of inflation. However, like any strong medicine, monetary tightening has the negative side effect of weakening economic growth.”