Stable level: Central Bank retains key rate unchanged

On Friday, October 26, the Board of Directors of the Bank of Russia left unchanged the key rate at 7.5% per annum. The reason for this decision was the stabilization of the situation in the domestic financial market. This is reported in the official statement of the Central Bank.

As noted in the regulator, the stabilization of the market and a decrease in exchange rate volatility occurred in the second half of September and October of this year. This situation became possible due to the increase in the key rate a month earlier and the suspension of foreign currency purchases under the budget rule until the end of 2018.

At the same time, the preservation of pro-inflation risks was emphasized at the Central Bank. Thus, according to the regulator, annual inflation returns to 4%. In September, the growth rate of consumer prices was 3.4% (3.5% as of October 22). At the same time last month, the main driver of growth was an increase to 2.5% in the cost of food products.

The Bank of Russia left its consumer price growth forecast unchanged by the end of 2018 to 3.8–4.2%. In the first half of next year, inflation may reach a maximum level and by the end of 2019 will be 5–5.5%. By the 4-percent indicator, consumer price growth may return in the first half of 2020, when the effects of the VAT increase will be exhausted.

It is curious that even before the beginning of the last meeting of the Board of Directors of the Central Bank (September 14), an in-house discussion started in the expert community about a possible increase in the key rate. However, this month, most experts expected it to be maintained at the same level.

Natalya Milchakova, Deputy Director of the Analytical Department of Alpari, noted that the main motive for an increase in September was not so much inflation, but ruble weakening. After the Bank of Russia raised the rate and refused to buy foreign currency within the framework of the budget rule, the fall in the national currency stopped.

“Now there are no factors for a rate increase, as well as for its reduction, because the external situation remains unstable. In addition, it is expected that next year inflation will accelerate, as there will be an increase in VAT. So, the Central Bank has no arguments for easing monetary policy, ”Milchakova said in an interview with RT.

Earlier, the first deputy chairman of the Central Bank, Ksenia Yudaeva, stated that a reduction in the key rate is unlikely and many factors speak in favor of its immutability.

According to Konstantin Korishchenko, head of the department of stock markets and financial engineering at RANEPA, the previous increase was of a preventive nature - it anticipated negative processes that could happen in the future.

“At present, the Russian economy is feeling well. Political tensions are also declining, given Trump’s assistant’s recent statement that the United States has not yet decided to impose new sanctions on Russia. Together, this suggests that the level of risk has not increased, and it would be inappropriate to raise the rate in such circumstances. There are also no prerequisites for its reduction, since the situation has not yet stabilized sufficiently. Therefore, it was logical to leave the key rate at the same level, ”stressed RT Korishchenko.

Restrained reaction

The Moscow Exchange index in the first half of the day on October 26 lost more than 1.8% and dropped below the level of 2300 points. Immediately after the announcement of the Central Bank of its decision, the indicator slightly declined.

In the mid-day foreign exchange market, the ruble exchange rate against the dollar and the euro slightly decreased relative to the opening level of trading.

“In principle, the market should not respond to saving rates, although the ruble sometimes behaves paradoxically. Usually, the national currency should react to a rise in the key rate by strengthening, and to a fall - by falling. But last year we observed how the Central Bank lowered the interest rate and the ruble almost always responded with growth, ”Natalya Milchakova reminded.

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According to Konstantin Korishchenko, market participants were convinced that the key rate of the Central Bank will not change.

“Now, participants in the stock and foreign exchange markets will be able to pay more attention to other factors — changes in world oil prices or developments in the US election. After all, the election results will affect the layouts in the US parliament, and this in turn may affect the introduction of new sanctions, for example, against Russian banks, ”said Korishchenko.

According to the expert, the preservation of the rate is more favorable for the market and the Russian economy, since its high level usually hinders the inflow of investments and economic activity.

The next meeting of the Board of Directors of the Central Bank is scheduled for December 14, where the issue of changing the key rate will also be discussed.

Natalya Milchakova notes that when making a decision, the Bank of Russia will continue to be guided by inflation indicators.

“I think that a rate increase is possible in principle, but not until next year. This year, no negative factors are expected, unless the US Congress passes a law extending sanctions to the Russian national debt. But I think that the probability of this is very small. According to our baseline scenario, the adoption of the law in its most rigid form will not happen, which means that this year’s rate will most likely not increase, ”concluded Natalia Milchakova.