Credit impulse: Bank of Russia lowered key rate to 4.25% per annum

On Friday, July 24, the Board of Directors of the Bank of Russia decided to reduce the key rate by 0.25 percentage points - to 4.25% per annum. The value became the lowest in the entire post-Soviet period.

As follows from the official message of the Central Bank, in its actions the regulator relied on the dynamics of consumer prices in Russia. So, today the inflation rate in the country is 3.3% and still remains below the Central Bank's target of 4%.

“After the decline in May-June, inflationary expectations of the population and business as a whole have stabilized. While the easing of restrictive measures is helping to revive economic activity, the recovery of the global and Russian economies will be gradual. In these conditions, there is still a risk of inflation deviating from 4% in 2021, ”the Central Bank said in a press release.

Meanwhile, the key rate cut should provide additional support to the Russian economy during the recovery period. This opinion was expressed in an interview with RT by leading analyst at Forex Optimum Ivan Kapustyansky. According to him, the actions of the regulator lead to a reduction in the cost of loans and thereby stimulate consumer and business activity in the country.

“Reducing the rate leads to a revival of consumer demand, accelerates the turnover of funds in the economy and supports production growth. The actions of the Central Bank are especially relevant in a crisis. Support for business activity can have a positive effect on the situation and restrain the rate of decline in GDP, ”the expert noted.

According to the Central Bank's forecast, in 2020 Russia's GDP will decrease by 4.5-5.5%. However, already in 2021, the country's economy will show compensating growth in the range of 3.5-4.5%, and in 2022 it will add about 2.5-3.5%.

According to experts, the decision of the Central Bank will have a positive impact on the Russian real estate market. Traditionally, banks monitor changes in the key rate of the Central Bank and, on the basis of decisions made by the regulator, independently determine the level of long-term lending rates, including mortgage rates.

At the end of May 2020, the average rate on housing loans in Russia dropped to the lowest level for the entire observation period - 7.4% per annum. At the same time, analysts interviewed by RT predict a further decline in the indicator in the coming months. 

“Mortgage lending always responds to key rate movements within one to two weeks. After today's decision by the Central Bank, the average mortgage rate may drop to 7-7.05% per annum, "Alexei Krichevsky, real estate market expert at the Academy of Finance and Investment Management, explained in a conversation with RT.

Recall that the last change in the key rate took place on June 19. Then the Central Bank reduced the indicator by one percentage point at once to 4.5% and explained its decision by a sharp deceleration of inflation in Russia.

The next meeting of the Board of Directors of the Central Bank is scheduled for September 18. At the same time, as expected, already during their first autumn meeting, the top management of the regulator will again consider the feasibility of reducing the rate. The head of the Central Bank Elvira Nabiullina announced this during a press conference.

“In the future, we will assess the nature of changes in monetary conditions, the nature of recovery processes in the economy, price dynamics and, taking this into account, assess the feasibility of reducing the key rate at the next meetings. In general, we believe that there may still be room for easing monetary policy, ”Nabiullina emphasized.

According to Ivan Kapustiansky's assessment, by the end of the year the Central Bank may further reduce the key rate to 3.5% per annum.

Currency response

Note that experts highly appreciated the likelihood of the Central Bank's key rate cut to 4.25% per annum. As the head of the data analysis department of CEX.IO Broker, Yuri Mazur, told RT, investors in their actions took into account the decision of the Bank of Russia in advance. Therefore, the rate cut in the short term will have a neutral effect on the ruble.

After the announcement of the results of the meeting of the Board of Directors of the Central Bank, the Russian currency showed slight weakening during trading on the Moscow Stock Exchange. The US dollar and euro exchange rates grew by 0.6% - to 71.9 and 83.3 rubles, respectively. The official exchange rate of the Central Bank on July 25 was 71.6 rubles per dollar and 83.1 rubles per euro.

Yuri Mazur believes that in the near future the dollar exchange rate will fluctuate in the range of 69-72 rubles. Further dynamics of the national currency will largely depend on the state of affairs in the Russian economy and oil prices, says Ivan Kapustyansky. According to him, the expected recovery of business activity in the country and the rise in energy prices from the current $ 43 to $ 45 per barrel will support the ruble.

“Moreover, the demand for risky assets in the world will gradually recover as the global economy returns to a sustainable growth trajectory. Confidence in this is given by the fact that many manufacturers have entered the home stretch in the development of a vaccine against coronavirus. Therefore, the Russian currency has generally positive prospects, and the dollar rate may drop to 67-68 rubles in the coming months, ”concluded Kapustyansky.