On Friday, June 11, the Board of Directors of the Bank of Russia raised the key rate by 0.5 percentage points to 5.5% per annum.

The leadership of the Central Bank explained its decision by the need to restrain the growth of consumer prices: inflation in the country is developing above the regulator's forecasts, the Central Bank stressed.

“In May, the monthly seasonally adjusted growth rates of consumer prices accelerated significantly, and the annual inflation increased to 6% (after 5.5% in April).

As of June 7, the annual inflation rose to 6.15%, ”the Central Bank said in a press release.

As explained in the Bank of Russia, consumer demand in the country is growing at an outstripping pace, and enterprises have not yet managed to increase the supply of goods and services to the required level.

In these conditions, it becomes easier for companies to cover production costs by increasing the cost of their products.

In addition, the overall rise in world prices for goods has a negative impact, the Central Bank said.

According to the regulator's assessment, in these conditions, inflationary expectations of Russians have been near their maximum values ​​for the past four years for several months.

This state of affairs further accelerates inflation, analysts say.

“The rise in inflationary expectations suggests that people are afraid of further price increases and begin to make large purchases earlier than originally planned.

As a result, consumer demand further increases, which further accelerates inflation, "Alexander Razuvaev, head of the Alpari information and analytical center, explained to RT.

According to him, raising the key rate is one of the traditional economic instruments for slowing inflation.

In particular, the actions of the Central Bank will help to strengthen the ruble exchange rate, which will help curb the rise in prices for imported goods.

“In addition, amid rising interest rates, people prefer to save more than spend.

This, accordingly, allows to cool demand and put pressure on prices.

At the same time, the development of production slows down a little, as a result of which investment costs of companies are reduced, ”Razuvaev added.

As noted in the Central Bank itself, the current policy will allow inflation in Russia to return to the target level (4%) in the second half of 2022.

In the future, the growth rate of consumer prices will remain close to the designated target, the Central Bank stressed.

The next meeting of the Board of Directors of the Bank of Russia is scheduled for July 23.

At the same time, experts interviewed by RT do not exclude that at the second summer meeting, the top management of the regulator will again raise the key rate - up to 6% per annum.

It is noteworthy that the chairman of the Central Bank Elvira Nabiullina during a press conference announced a high probability of a rate hike in July.

“The Board of Directors sees the need to raise rates at the next meetings.

We will choose the scale and pace of the rate hike based on our assessment of the level of sustained inflationary pressures, the timing of inflation expectations normalization, as well as forecasts of further dynamics of aggregate supply and demand, ”Nabiullina said.

Regulator hints

Recall that the previous increase in the key rate took place on April 23.

Then the Central Bank increased the rate from 4.5% to 5% per annum and also explained its decision by the need to curb inflation.

It is curious that in addition to the official statements and forecasts of the Central Bank, investors and experts also closely monitor the non-verbal signals of the Central Bank chairman.

Leading strategist of EXANTE Janis Kivkulis spoke about this in an interview with RT.

“It has already become a tradition to pay attention to Elvira Nabiullina's brooch at every press conference, as a kind of signal from the head of the Central Bank.

Last time it was a spiral, which may indicate the Central Bank's fears about the unwinding of the "inflationary spiral".

Now it is a leopard, which, perhaps, means the desire of the regulator to act quickly to combat price increases, ”the specialist noted.

Against this background, the specialist also did not rule out that by the end of the summer the key rate of the Central Bank may reach 6% per annum.

Earlier, a similar indicator could be observed even before the start of the coronavirus pandemic.

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Percentage reversal

Note that in 2020, as part of supporting the economy and business, the Central Bank confidently reduced the key rate and lowered it from 6.25 to 4.25% per annum - the minimum level for the entire post-Soviet period.

Traditionally, banks closely monitor changes in the key rate of the Central Bank and, on the basis of decisions taken by the regulator, determine the level of their long-term lending rates, including mortgage rates.

Against this background, from January 2020 to February 2021, the average interest on housing loans in Russia dropped from 9.05% to 7.23% per annum.

The value became the lowest ever observed.

At the same time, already in April, the figure rose to 7.3% and will continue to grow in the near future, experts say.

So, closer to the beginning of 2022, the average mortgage rates in Russia may reach the range of 8.3-9.8% per annum.

This was told to RT by Alexander Osin, an analyst of the department of trading operations on the Russian stock market at IC Freedom Finance.

“These estimates just reflect the fact that the authorities, on behalf of the president, are now discussing an increase in the rate within the framework of the preferential mortgage program from 6% to 7% per annum,” Osin added.

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  • © Vladimir Song

In 2020, the decrease in the key rate of the Central Bank led to a drop in the profitability of bank deposits.

So, according to the regulator's assessment, from January to December, the maximum rate on deposits in the ten largest banks dropped from almost 6% to 4.49% per annum.

However, already now the indicator is very close to 5%

According to the forecast of Alexander Osin, by the end of 2021, rates on deposits of individuals with a maturity of more than one year may rise to 5.5-6.5% per annum.

In the current environment, experts interviewed by RT predict an increase in citizens' interest in bank deposits.

At the same time, as the head of the Deposit Insurance Agency Yuri Isaev noted in a conversation with RT, this method of investment remains the most secure today.

“In 2020, deposit rates dropped, and it became convenient for depositors to use more flexible instruments: demand deposits, current accounts, the volumes of which have grown significantly recently.

On the other hand, deposits in Russia are protected by the state, which makes these investments the most reliable, ”Isaev emphasized.

Chances of strengthening

After the announcement of the results of the Central Bank meeting, the Russian currency strengthened slightly on the Moscow Exchange.

So, in the second half of the day, the dollar rate decreased by 0.3% to 71.55 rubles.

The value was the lowest since July 2020.

At the same time, the euro rate fell by 0.4% and for the first time in the last three months reached 86.95 rubles.

According to analysts, an increase in the key rate in the future should lead to an inflow of investments into the federal loan bond market (OFZ).

At the same time, the active purchase of government securities by investors traditionally leads to a rise in the ruble price.

Recall that OFZs are debt obligations guaranteed by the Russian government.

Financial market participants 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.

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

Thus, in the event of a further increase in the percentage of borrowing by the Central Bank, investments in OFZs will become even more profitable for investors in comparison, for example, with the purchase of US and European government securities, experts say.

So, today in Russia the yield on government securities with a maturity of ten years is about 7.2% per annum, in the United States - 1.4%, in France - 0.1%.

At the same time, in Germany the indicator is negative - about -0.3%.

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“We see that the increase in the key rate in recent months has already led to an increase in the yields of ruble-denominated government bonds.

The gap between the yields of our debt securities and bonds denominated in dollars and euros has noticeably increased.

This makes the ruble more attractive for capital inflows, "Olga Belenkaya, head of the macroeconomic analysis department at Finam Group, told RT.

According to Alexander Razuvaev's forecast, in case of further growth of the key rate, by the beginning of autumn, the dollar exchange rate may drop to 70 rubles, and the euro rate - to 84 rubles. In turn, Janis Kivkulis admits a more confident strengthening of the national currency. According to him, already in the middle of summer the dollar exchange rate can drop below 70 rubles.