The Central Bank's decision threatens a slowdown in wage growth and a decline in citizens' living standards
At the final, ninth meeting of the Board of Directors this year, the Bank of Russia decided to raise the key rate by 1 percentage point, from 15 % up to 16%. This is the fifth increase in this indicator by the regulator since the end of July, when the Central Bank of the Russian Federation moved to tighten its monetary policy (MP). Experts have ambivalent assessments of the regulator’s decision and see many disadvantages in it for the wallets of their compatriots.
“The main reasons for the rate increase are the movement of inflation above the forecast corridor of the Central Bank, outlined at the last meeting. At the end of the year, we expect inflation to rise to 7.6%.
The rate increase this time, as in the past, for citizens and businesses will be reflected in an increase in the return on deposits and the cost of credit resources. The Central Bank raises the rate in order to reduce overall demand through a higher savings rate (more profitable deposits) and a lower ability to finance consumption through lending (more expensive loans). Well, more expensive loans contribute to a slowdown in the economic activity of enterprises, as the cost of investments rises. We assume that the current cycle of rate increases will lead to a sharp slowdown in economic growth in 2024: by the end of next year, we predict an increase in GDP by 1% versus 3.1% in 2023.
At the same time, you should not expect an immediate reaction from inflation to the rate increase and a sharp decline or slowdown in price growth after today’s meeting of the Bank of Russia. We believe prices will mostly slow in 2024 and headline inflation will fall to 5% next year. The ruble will strengthen due to the already implemented tightening of the regulator’s monetary policy throughout 2024. Wage increases are likely to slow after strong growth this year amid a general economic slowdown. And pensions and benefits will be indexed to a level close to inflation — this is standard practice for the government.»
«The population is observing, according to sociologists' surveys, inflation at 14%, and in November annual inflation, according to Rosstat, rose to 7.48% and almost reached the upper limit of the Central Bank of the Russian Federation forecast for the entire 2023 of 7–7.5%. All this became the reason for another increase in the key rate by the regulator.
For economic growth in Russia, any further increase in this indicator is bad news. Loans for small and medium-sized businesses will simply become unavailable, and there are very few other options for financing small enterprises and startups in Russia, except perhaps grants from regional authorities, and even then not every legal entity can receive them. It is possible that in the first quarter of 2024 there will be a noticeable slowdown in economic growth in annual terms. However, most likely, an increase in the key rate in December may put an end to the continued tightening of the monetary policy of the Central Bank of the Russian Federation, and in 2024 interest rates will no longer rise. After the decision of the Bank of Russia, the exchange rate may fluctuate between 88–93 rubles per dollar and 96–102 rubles per euro until the end of December.
For ordinary Russians, the decision on the key rate of the Central Bank of the Russian Federation will, as always, be ambiguous. For potential borrowers, the news is, of course, bad, since banks’ interest rates on loans will increase, but those borrowers who can get a mortgage under one of the preferential programs with a low interest rate before July 1, 2024 will be relatively lucky. But depositors will be lucky, since banks, after raising the key rate of the Central Bank of the Russian Federation, will continue to increase interest on deposits, which means their owners will be able to earn good money.”
“Currently, expectations of an increase in the key rate are already included in prices, so after the meeting of the Central Bank of the Russian Federation this decision will not have much impact on the ruble exchange rate. However, in the future, the regulator’s strict monetary policy supports the exchange rate of the national currency.
Until the end of the year, the dollar is likely to remain significantly below the 100 ruble mark. The corridor of 87–102.5 rubles per unit of US currency remains relevant. If a moderately positive scenario is implemented, against the backdrop of economic growth, containment of inflation and a significant reduction in the withdrawal of capital from Russia, the dollar may lose ground to 85 rubles in the coming month. The peak values for the dollar and euro passed at the end of summer; until the end of the first quarter of next year, the ruble is able to demonstrate further recovery.
Against the backdrop of a shortage of investment resources in the economy, an increase in the key rate significantly cools the implementation of new business investment ideas. The population has already experienced very expensive loans in the outgoing quarter of the year — then they will have to get used to them.”
“Increasing the key rate will slow down the pace of development of the country’s economy, especially in the context of increasing loan costs. Mortgage interest rates on the secondary market in some banks have already exceeded 17–20% per annum. Such conditions make housing lending inaccessible to many citizens, firstly, due to unaffordable monthly payments, and secondly, due to high requirements for the solvency of borrowers. The same can be said about consumer loans. As for legal entities, an increase in the interest rate could slow down the development of both individual companies and entire industries.
Increasing the key rate will help temporarily stabilize the Russian currency in the range of 90–92 rubles per dollar, however, most likely this will will be a short term effect. For Russians, this update will likely lead to a decrease in living standards, as purchasing power will decrease. First of all, citizens will refuse large and expensive purchases: housing, travel, cars… The high cost of credit can lead to a reduction in other consumer spending, thereby slowing down the economic activity of the population as a whole.”