Crash rate: Bank of Russia lowers key rate to 6.5% per annum

On Friday, October 25, the Board of Directors of the Bank of Russia lowered the key rate by 0.5 percentage points to 6.5% per annum. The value has become the lowest since March 2014.

In 2019, the Russian regulator has already reduced the rate for the fourth time.

According to an official statement by the Central Bank, consumer price growth in Russia is slowing faster than expected. As a result, the regulator lowered its inflation forecast for 2019 from 4–4.5% to 3.2–3.7%. As expected by the Central Bank, in 2020 the figure will be about 3.5-4%, after which it will remain near the target mark of 4%.

“The slowdown in inflation is faster than predicted. Inflationary expectations continue to decline. The growth rate of the Russian economy remains restrained. The risks of a significant slowdown in the global economy remain. In the short term, disinflation risks prevail over pro-inflation risks, ”the Central Bank said in a press release.

As noted in the regulator, depending on further changes in inflation dynamics and economic development, the Bank of Russia will assess the feasibility of further reducing the key rate at one of the next meetings.

Note that the last change in the key rate of the Central Bank occurred in September. Then the regulator lowered it from 7.25% to 7% per annum and also explained this decision by the slowdown in inflation in the country.

The next meeting of the Board of Directors of the Central Bank is scheduled for December 13. According to Anton Pokatovich, the chief analyst of BCS Premier, in an interview with RT, already during the first winter meeting the top management of the regulator can again lower the rate to 6.25% per annum. According to the analyst, at the beginning of 2020, inflation in Russia may drop to 2.2–2.5% and the Central Bank will continue to cut rates.

QBF lead analyst Oleg Bogdanov considers it possible to cut rates in December immediately to 6% per annum. As the expert explained in a conversation with RT, if in the coming months inflation continues to remain below the current level of 3.8%, then by the end of 2020, the key rate may drop to 5% per annum.

At the same time, the regulator traditionally tries to take into account all the existing uncertainties, therefore, it will try to act carefully. This was stated in an interview with RT by the director of financial markets and macroeconomics analysis at Inst Invest Invest Alexander Timofeev.

“There is a possibility that the regulator will reduce the rate in December and will not change it in the first half of 2020. Such a pause is necessary for the Central Bank to assess the general situation in the economy. If so, then in about a year the rate will be near the lows of 2013, ”Timofeev added.

Housing issue

As analysts explain, lowering the rate is necessary to stimulate business activity in the country and economic growth in general. So, in the long run, the actions of monetary authorities lead to cheaper loans, an increase in domestic demand and investment.

In particular, experts expect a more active reduction in mortgage rates amid the policy of the regulator. According to the latest Central Bank data, in August, the average mortgage rate in Russia fell to 9.9% per annum. According to Anton Pokatovich, already in 2020, the figure may fall below 9%.

“We believe that until the end of 2019, mortgage rates will continue to gravitate to levels of 9.3-9.6% per annum. In 2020, we see the potential for lowering mortgage rates in the range of 8.5-9% per annum, ”the expert emphasized.

Recall that at the end of February, President Vladimir Putin officially instructed the government and the Central Bank to take measures to reduce the mortgage rate by at least 8%. The Central Bank considers it possible to complete the task by 2024. This was previously stated by Elvira Nabiullina.

About the same scenario is laid down in the national project “Housing and Urban Environment”. The program assumes that the percentage of housing loans will decrease to 8.9% in 2019, then to 8.5% in 2021 and 7.9% in 2024.

Currency calm

Experts interviewed by RT highly appreciated the likelihood of a Central Bank rate cut immediately to 6.5% per annum. According to Alexander Timofeev, the Bank of Russia seeks transparency of its decisions and prepares markets in advance for changes in monetary policy. So, in mid-October, Elvira Nabiullina announced the possibility of a more decisive reduction in the rate.

As a result, investors in their actions took into account the decision of the Bank of Russia in advance, so a decrease in the short term will have a limited effect on the ruble, Timofeev said. 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 slightly strengthened during trading on the Moscow Exchange. Thus, the dollar depreciated by 0.15% - to 63.9 rubles, and the euro - by 0.01%, to 71 rubles.

The official exchange rate of the Central Bank on October 26 was 63.99 rubles per dollar and 71.12 rubles per euro.

As noted by Oleg Bogdanov, in the long term, a continued reduction in the Central Bank rate will positively affect the Russian currency. While the key rate is still at a relatively high level, investors are trying to actively buy Russian debt securities at more attractive returns. The actions of market players increase the cost of government securities and support the ruble.

According to the Moscow Exchange, to date, the government bond index (RGBI) has already reached the highest levels in the entire history of observations and is trading near 149 points.

“Until the rate reduction process is completed, we are seeing an increase in prices on the government securities market. The yield on federal loan bonds (OFZ) with a maturity of one year has already fallen below 6%. The market is ahead of the curve and government bonds are confidently getting more expensive. This is starting to attract investors, which plays in support of the ruble, ”Bogdanov explained.

As the head of the analytical department of Veles Capital investment company Ivan Manaenko said in an interview with RT, at the moment investors are not expecting sharp fluctuations in the foreign exchange market. According to him, by the end of the year, seasonal factors will begin to exert pressure on the ruble, but at the same time, the dollar will remain close to 64 rubles, and the euro - around 72 rubles.