On Friday, September 18, the Bank of Russia Board of Directors met the expectations of most market participants and kept the key rate at 4.25% per annum.

The Central Bank explained this decision by the need to contain inflationary risks.

“In recent months, the rate of price growth has generally been somewhat higher than the Bank of Russia's expectations.

This is due to two main factors: an active recovery in demand after a period of self-isolation, as well as a weakening of the ruble due to a general increase in volatility in world markets and increased geopolitical risks.

Inflationary expectations of the population and enterprises remain at an elevated level, ”the Central Bank said in a press release.

According to the regulator, in August the level of annual inflation in Russia rose to 3.6% (after 3.4% in July), and by mid-September it reached 3.7%.

Meanwhile, the actions of the Central Bank should restrain further growth in consumer prices.

“In the context of the current monetary policy, annual inflation will be 3.7-4.2% in 2020, 3.5-4% in 2021 and will be close to 4% in the future,” the Bank of Russia stressed.

According to the Central Bank's assessment, economic activity in Russia is recovering faster than previously predicted.

The recovery is most pronounced in the sectors focused on domestic consumer demand.

Against this background, the regulator plans to revise its macro forecast in October.

“As for our forecast for GDP, our current forecast is for July, in October we will really revise it, our forecast is 4.5-5.5%.

But now such a preliminary assessment, based on how the situation is developing, how quickly the economy is recovering, we rather see that the situation will develop a little better, and the forecast for GDP will be closer to the upper border, to 4.5%, ” said the head of the Central Bank Elvira Nabiullina during a press conference.

Paper dump

As the head of the Center for Macroeconomic Analysis of Alfa-Bank, Natalia Orlova, told RT, partly the decision of the Central Bank to keep the rate is due to the outlined outflow of foreign investment from the Russian federal loan bond market (OFZ).

According to the latest data from the Central Bank, in July the share of non-residents in OFZ fell below 30% for the first time since October 2019.

Federal loan bonds are debt securities guaranteed by the government of a country.

Investors buy securities issued by the Ministry of Finance and receive a stable income from them.

In other words, holders of government bonds lend their money to the Russian economy.

Meanwhile, the yield on debt securities directly depends on the interest rate set in the country.

Since since the beginning of 2020, the Central Bank has already reduced the borrowing rate from 6.25 to 4.25% per annum, investments in OFZs have become less profitable for investors.

Thus, to support the government bond market, the Bank of Russia has temporarily suspended the key rate cut, analysts are sure.

However, the interest rate in Russia is still significantly higher than the indicators of the USA (0-0.25% per annum) and the eurozone (0%).

As a result, investments in OFZs are still more profitable for market players than investments in American and European government securities.

Against this background, experts do not expect a further outflow of funds from Russian bonds.

“International players benefit from the high rate in rubles, they are ready to invest in OFZs, since the stability of the economy remains in the medium term.

It is ensured by the fact that the budget can be financed without a critical increase in debt, and the backbone companies and banks are holding on well, "said Georgy Vaschenko, head of the trade operations department in the Russian stock market at Freedom Finance, to RT.

New incentive

Recall that the last change in the key rate took place on July 24.

Then the Central Bank reduced the rate from 4.5 to 4.25% per annum and explained its decision by the low inflation rate in Russia.

The next meeting of the Board of Directors of the Central Bank is scheduled for October 23.

At the same time, as expected, already during their second autumn meeting, the top management of the regulator will again consider the feasibility of reducing the rate.

“The main path of easing monetary policy has already been passed.

Since June 2019, the key rate has decreased by 350 basis points, of which by 200 basis points in the current year, to a historically low level.

We still see some space for reducing the key rate, but we will assess the timing and necessity of using this space, ”Nabiullina emphasized.

As the asset manager of BCS Andrei Rusetsky suggested in a conversation with RT, by the end of the year the Central Bank may once again lower the key rate - to 4% per annum.

According to the expert, such a decision will become an additional stimulus for economic recovery.

Alexey Korenev, an analyst at FINAM Group, adheres to a similar assessment.

“There are certain factors in favor of lowering the rate.

As a result of the actions of the Central Bank, borrowed money becomes cheaper, which is of course beneficial for business and the population, "Korenev explained.

Neutral reaction

Analysts interviewed by RT highly appreciated the likelihood of maintaining the Central Bank's key rate at 4.25% per annum.

According to Denis Ikonnikov, portfolio manager of QBF investment company, investors in their actions took into account the decision of the Bank of Russia in advance.

Therefore, in the short term, the actions of the regulator 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 a slight strengthening on the Moscow Exchange.

The US dollar exchange rate declined by 0.2%, to 75 rubles, and the euro rate - by 0.25%, to 88.9 rubles.

The official exchange rate of the Central Bank on September 19 was set at 75.03 rubles per dollar and 88.96 rubles per euro.

  • RIA News

  • © Vladimir Trefilov

“Now political factors have a serious impact on the ruble quotes.

An escalation of negative political rhetoric, including sanctions, may negatively affect the Russian currency.

If this scenario is realized, then the dollar and euro rates will remain above 75 and 85 rubles, respectively.

Otherwise, the indicators may drop to 70 and 80 rubles by the end of the year, ”says Denis Ikonnikov.

According to Alexei Korenev, in the near future the dynamics of the Russian currency will also depend on the cost of oil.

According to the expert's forecast, the dollar will remain below 78 rubles until the end of autumn.

In turn, according to Georgy Vashchenko, in September the indicator will continue to fluctuate in the range of 73-77 rubles.