A vaccine for the economy: the Bank of Russia lowered its key rate to 4.5% per annum

On Friday, June 19, the Board of Directors of the Bank of Russia decided to reduce the key rate by one percentage point to 4.5% per annum. The value became the lowest for the entire post-Soviet period.

According to an official statement by the Central Bank, consumer price growth in Russia is slowing faster than expected. To date, the inflation rate in the country is 3.1% and still remains below the Central Bank's target mark of 4%.

“The inflationary expectations of the population and business have declined. Under these conditions, there is a risk of a significant deviation of inflation down from the 4% target in 2021. The decision at a key rate is aimed at limiting this risk and keeping inflation close to 4%, ”the Central Bank press release said.

Reducing the key rate is one of the key factors supporting the economy in the context of the coronavirus pandemic. This opinion in a conversation with RT was expressed by the head of the analytical department of AMarkets Artyom Deev. According to him, the actions of the regulator lead to cheaper loans and thereby stimulate business activity in the country.

“The economy needs cheap borrowed funds to support the restart of enterprises and financial institutions, whose activities were suspended during the period of self-isolation. Also, issuing loans at a low interest rate will increase the profitability of small and medium-sized businesses, which will accelerate the process of economic recovery to a certain extent, ”the expert said. 

In addition, the reduction in the key rate is associated with the desire of the regulator to support consumer demand. This was in an interview with RT, told Anna Bodrova, a senior analyst at the Alpari Information and Analytical Center.

“As a result of the actions of the Central Bank, interest rates on consumer loans and mortgage loans will be significantly lower. This will allow us to quickly restore the solvency of the population and stimulate purchasing activity in non-food retail, ”Bodrova explained. 

Recall that the last change in the key rate by the Bank of Russia occurred at the end of April. Then the regulator lowered the indicator by 0.5 percentage points to 5.5% and explained its decision to support the Russian economy in the context of the global COVID-19 pandemic and falling oil prices.

The next meeting of the Board of Directors of the Central Bank is scheduled for July 24. Moreover, as expected, already during its second summer meeting, the top management of the regulator will again consider the feasibility of lowering the rate. This was during a press conference, said the head of the Central Bank Elvira Nabiullina.

“The market situation returned to normal, volatility decreased significantly, risk premiums fell, oil prices returned to the level of $ 40 per barrel. Thus, the events of the past month and a half have fully confirmed the availability of space for a significant reduction in the key rate, and we use it. At the next meetings, we will assess how appropriate it is to further reduce the key rate, ”Nabiullina emphasized.

According to RT economist, BCS Premier Anton Pokatovich, by the end of 2020, the Central Bank may further reduce its key rate to 3.5-4% per annum. 

Positive for the ruble

Experts interviewed by RT praised the likelihood of a decrease in the Central Bank's key rate to 4.5% per annum. So, investors in their actions took into account the decision of the Bank of Russia in advance. At the same time, the regulator’s statements about the possibility of another reduction at the next meetings were positively received by the market, Anna Bodrova said.

After the results of the meeting of the Board of Directors of the Central Bank were announced, the Russian currency was moderately strengthened on the Moscow Exchange. The US dollar depreciated by 0.7% to 69.4 rubles, while the euro depreciated by 0.8% to 77.7 rubles.

The official exchange rate of the Central Bank for June 20-22 is set at 69.57 rubles per dollar and 78 rubles per euro.

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First of all, the policy of the regulator affects the Russian government securities market. Reducing the Central Bank rate over time lowers the yield of federal loan bonds (OFZ), so investors are trying to pre-purchase securities at a bargain price. At the same time, the rush of money flow into the Russian OFZ can support the national currency, Anton Pokatovich believes.

“If in the next few months, the market receives additional signals from the regulator that the rate reduction cycle has not yet ended, then foreign investors will begin to actively buy out Russian debt securities in order to manage to get a higher percentage on deals. As a result, foreigners will buy up the ruble, which, according to the results of the summer, will allow the national currency to gain a foothold at the turn of 69 rubles per dollar, ”Pokatovich explained. 

According to Anna Bodrova, in addition to the policy of the Central Bank, in the coming months the dynamics of the Russian currency will also depend on the situation on the world oil market. According to the expert’s forecast, under current conditions, in the near future, the dollar may fall to the level of 68.5 rubles, and the euro - to 77 rubles.