The Bank of Russia continues its “hawkish” policy
The Central Bank’s increase in the key rate from 13% to 15% was its fourth increase in the last four months. We found out from expert economists what will happen to the ruble exchange rate and what other aspects of Russians’ lives will be affected by the increase in the key rate.
“When making decisions on the key rate, the Bank of Russia is guided by the current rate of monthly inflation with seasonal adjustment in annual terms. According to the Central Bank of the Russian Federation, the current inflation rate accelerated in September. Weekly inflation, according to Rosstat, remains significantly higher than the seasonal norm for the 17th week in a row. Annual inflation rose to 6.4%. Almost all categories of goods are becoming more expensive, except gasoline, the price of which is restrained by administrative methods.
The acceleration of inflation will be facilitated by the transfer into prices of the weakening of the ruble that has already occurred since the beginning of the year: the dollar has grown by 39% since the beginning of 2023.
Another factor that predetermined the increase in the key rate: high inflation risks. The labor market remains extremely tight, and the shortage of personnel is increasing. Thus, unemployment in August reached another historical low of 3% after 3.1% in July. Due to the shortage of personnel, wages are growing at a rapid pace, outpacing labor productivity. Salaries in the Russian Federation in July increased by 9.2% in real terms after increasing by 10.5% in June. This is a pro-inflationary factor.
An increase in the key rate will lead to an increase in the cost of loans, which will reduce consumer and investment demand, including for imports (and reduce the demand for currency). In addition, an increase in deposit rates and bond yields will increase the attractiveness of ruble savings and increase the demand for rubles.
We expect that, following an increase in the key rate, deposit and loan rates will rise by a comparable amount. It is also likely that yields on the OFZ market will continue to grow, followed by mortgage rates.”
“The main factor in favor of further tightening of the Central Bank’s actions on the key rate was the expected easing of budget policy in the coming years. The budgetary factor could force the regulator to increase the rate more significantly, but now such a need has been minimized due to the sharp strengthening of the ruble and the slowdown in consumer lending in September.
The ruble will most likely not notice the results of the meeting of the Central Bank of the Russian Federation . For the foreign exchange market, the main guideline now is how effectively the measure of mandatory sale of foreign currency earnings will work. This will appear at the beginning of next month.
For savings, we can expect a further increase in rates, since so far banks have raised them more slowly than the key rate of the Central Bank of the Russian Federation has grown. The main increase in profitability will be observed on deposits with a maturity of up to six months. For loans not related to preferential government programs, rates are already high. Here, the influence is exerted not only by the increase in the key rate, but also by the regulatory tightening of the Bank of Russia. Since October, a number of additional restrictions by the Central Bank of the Russian Federation have come into force, which will increase the percentage of refusals when considering loan applications.”
“The decision of the Bank of Russia was expected, given the acceleration of inflation to 6% in September and fears of a further acceleration in prices. However, it is unlikely to lead to a strengthening of the ruble exchange rate. The rate has a limited impact on the foreign exchange market.
Until the end of October 27, we expect the dollar to trade in the range of 95-97 rubles. At the same time, we expect the European currency to fluctuate in the region of 100-103.5 rubles per euro. After October 27, the likelihood of a decline in the dollar exchange rate to 92-93 rubles, and the euro to 98-99 rubles will sharply increase.”
“Once again, bank financing for enterprises will be sharply reduced. Already today, the effective interest rate on loans reaches 25%, which makes it, in fact, protective. Small and medium-sized businesses especially suffer in this situation, since not all real needs are covered by government support programs.
Consumer lending will decrease sharply. We saw this in the example of March-April 2022, when the issuance of loans to individuals was halved. In addition, banks will tighten requirements for potential borrowers. Problems will also arise for developers, since their business is based on constant access to credit resources, preferably long-term ones. Developers are unlikely to borrow today on such terms. All this means a decrease in business activity and uncertainty in business planning.
But there is good news. Banks will once again raise deposit rates, and it makes sense for citizens to transfer their savings at the interest rates offered.”