The game ahead of the curve: the Central Bank of Russia raised the key rate to 7.75% per annum

On Thursday, December 14, the Board of Directors of the Bank of Russia raised the key rate by 0.25 percentage points to 7.75% per annum. The reason for this decision was the desire of the regulator to limit inflation risks. This is stated in the official statement of the Central Bank.

“The decision is proactive and is aimed at limiting inflation risks, which remain at an elevated level, especially in the short term. There is still uncertainty about the further development of external conditions, as well as the reaction of prices and inflation expectations for the upcoming VAT increase, ”the Central Bank said in a press release.

According to the Central Bank, the increase in the key rate will prevent the stable fixation of inflation at a level significantly exceeding the target of 4%. At the end of 2019, the regulator predicts a rise in the consumer price index to a range of 5–5.5% with a return to the target mark by 2020.

On December 14, 2018, the Board of Directors of the Bank of Russia decided to raise the key rate by 0.25 percentage points to 7.75% per annum: https://t.co/VqdNhedf0gpic.twitter.com/ijIcoW5bzW

In its press release, the Bank of Russia also announced its intention to resume purchases of foreign currency in the domestic market as part of the budget rule from January 15. Recall, after a sharp weakening of the national currency at the end of summer, the regulator stopped buying currency from August 23.

The previous change in the key rate of the Central Bank occurred in September. At that time, for the first time since December 2014, the regulator raised it from 7.25% to 7.5% per annum and explained this decision by changing external conditions, as well as by increasing inflation risks. At the same time, at a meeting in October, the regulator retained the status quo and left rates unchanged against the background of the stabilized situation in the country's financial market.

According to analysts interviewed by RT, the December meeting of the Board of Directors of the Central Bank was one of the most unpredictable in 2018. Against this background, in their assessments, the experts held different opinions as to whether the regulator will again tighten monetary policy.

Thus, on the eve of the meeting of the Board of Directors of the Central Bank, the chief analyst of BCS Premier, Anton Pokatovich, estimated the probability of a rate hike at 55%. As the expert suggested, the Central Bank in its decision focused specifically on internal inflation risks. According to Rosstat, in early December, the consumer price index in Russia accelerated by 0.3% to 3.8% in annual terms. Thus, inflation in 2018 may be higher than the values ​​predicted by the regulator.

“Even if in the next few weeks the price growth rate does not accelerate, then at the end of December we will probably see inflation rising by 0.85–0.9%. This will accelerate annual inflation to 4.3%. This value not only exceeds the target level of 4%, but goes beyond the range forecasted by the Central Bank of 3.8–4.2% for the year, ”Pokatovich explained.

Moreover, experts explain the increase in the Central Bank rate in December by the need to protect the ruble from the negative impact of external risks. Thus, the decision to tighten monetary policy is a kind of preemptive step before the start of the next round of sanctions pressure on Russia. This was in an interview with RT said the head of the analytical department of the company "International Financial Center" Roman Blinov.

At the same time, as noted by Anton Pokatovich, the Russian currency today needs additional support after the recent fall in oil prices. The decision of OPEC + to increase hydrocarbon production by 1.2 million barrels per day should protect energy prices from falling to $ 50 a barrel, the cost of oil can only grow in the new year. This factor also became one of the reasons for the increase in the Central Bank rate.

Return to the market

At the time of the announcement of the results of the meeting of the Board of Directors of the Central Bank, the Russian currency was trading in different directions on the Moscow Stock Exchange. Thus, the dollar rose by 0.2% - to 66.3 rubles, and the euro fell by 0.4% - to 74.9 rubles.

According to experts, the increase in the Central Bank rate may briefly strengthen the Russian currency, but the regulator’s intention to return to the open market will put some pressure on the ruble. According to Roman Blinov, by the new year the dollar rate may approach the level of 67-68 rubles. At the same time, the outcome of the expected US Federal Reserve meeting on December 9 may also have a negative impact on national currencies in the near future.

“The dynamics of the ruble on the stock exchange is influenced not only by the regulator’s statement regarding future volumes of foreign currency purchases, but also by the results of the US Federal Reserve meeting at the interest rate. Following the Fed, many global central banks are tightening monetary policy, which immediately affects emerging markets and, in particular, puts pressure on the Russian ruble, ”explained Sergey Kozlovsky, head of the analytical department at Grand Capital.

The next meeting of the Board of Directors of the Bank of Russia is scheduled for February 8, 2019. As QBF analyst Denis Ikonnikov believes, the top management of the regulator will not raise the rate and will take a wait until the spring meeting, which is scheduled for March 22.

As Sergei Kozlovsky believes, in the future, the Central Bank in its monetary policy will pay attention to the situation with sanctions and the access of Russian business to lending abroad. At the same time, according to Anton Pokatovich, today there is a likelihood of the return of the Central Bank to the rate reduction already in the second half of 2019.

“If the rigid scenario of sanctions is not implemented, and the oil quotes return to the level of $ 70, then the Central Bank will keep the level of the rate unchanged for three quarters of 2019. After that, we do not exclude the possibility of smoothly easing monetary policy and reducing the rate to 7.5%, ”the expert concluded