Up to 7.5% per annum: The Bank of Russia lowered the key rate for the sixth time in a row

On Friday, September 16, the Board of Directors of the Central Bank of Russia decided to cut the key rate by 0.5 percentage points at once - from 8 to 7.5% per annum.

The last time a similar value could be observed was in December 2021.

As explained in the Central Bank, the current growth rates of consumer prices in the country remain low and contribute to a further slowdown in annual inflation.

Thus, according to the regulator, in August the corresponding figure fell from 15.1% to 14.3%, and by September 9 it reached 14.1%.

“The decline in headline inflation was largely due to the ongoing correction in prices for goods and services after their sharp rise in March.

This was facilitated by the dynamics of the ruble exchange rate and the generally restrained dynamics of consumer demand,” the Central Bank said in a press release.

As emphasized in the Central Bank, the dynamics of business activity is better than previously expected.

Meanwhile, the external conditions for the Russian economy are still difficult and significantly limit the work of business.

Along with this, inflation expectations of the population and enterprises are still at an elevated level, the regulator added.

Note that the Bank of Russia has been reducing its key rate for the sixth time in a row.

According to analysts, such actions of the regulator traditionally lead to cheaper loans, an increase in the circulation of money in the economy, as well as a revival of business and consumer activity.

“Reducing the rate stimulates consumer demand and the development of the economy as a whole, as interest rates on loans are reduced.

Citizens are more active in making purchases, including expensive ones, because, for example, car loans and mortgages are getting cheaper.

Business, in turn, can borrow more funds and direct them to their own development, the purchase of equipment and an increase in the scale of production, ”Fyodor Sidorov, founder of the School of Practical Investment, explained in an interview with RT.

Recall that at the end of February the Bank of Russia sharply raised its key rate to a record 20% per annum.

The regulator took this decision as one of the anti-crisis measures in the face of large-scale Western sanctions against Moscow.

The initiative of the Central Bank was designed to stabilize the situation on the financial market and contain the sharply accelerated inflation.

At the same time, against the backdrop of the actions of the Central Bank, already in March, market mortgage rates in Russia rose to 23-24%, and the average interest on deposits - up to 20.51% per annum.

However, since mid-spring, the regulator began to systematically lower the key rate as inflation slows down, panic in the consumer sector decreases and the situation on the financial market normalizes.

As a result, to date, the average market mortgage rates in Russia have fallen to 10.05-10.18%, and the maximum interest on deposits in the ten largest banks - up to 6.84% per annum, as evidenced by the materials of the Central Bank and the company "DOM. RF".

“The current rate cut by the Central Bank will lead to the fact that bank interest on commercial loans and deposits will decrease again.

According to our forecast, mortgage rates will fall by another 0.5-1 percentage point.

Rates on consumer loans will drop by about the same amount, although some banks are already issuing them at 7 and even 6.9% per annum.

Deposit rates will also fall after the key one - by approximately 0.5-1 percentage points, ”Natalia Milchakova, a leading analyst at Freedom Finance Global, told RT.

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The next meeting of the Board of Directors of the Central Bank is scheduled for October 28.

According to a press release from the regulator, in the future the Central Bank will decide on the key rate depending on the dynamics of inflation, the process of economic restructuring, as well as an assessment of internal and external risks.

Nevertheless, the space for further rate cuts has narrowed, Elvira Nabiullina, head of the regulator, said.

“The cycle of rate cuts is likely close to completion.

There are many signs that current inflationary pressures are fading.

Under these conditions, we consider it expedient to remain in the neutral policy zone,” Nabiullina said during a press conference.

Experts, however, do not exclude that the regulator in the foreseeable future may still somewhat soften monetary policy.

Thus, according to Vasily Karpunin, head of the Information and Analytical Content Department at BCS World of Investments, by the end of the year there is a possibility of a rate cut by an additional 0.5 percentage points. 

“Current consumer price growth will increase in the coming months.

This is due to the pass-through effect from the strengthening ruble and the recovery in consumer demand due to the easing of credit conditions and a decrease in the propensity to save.

By the end of the year, we expect a rate in the range of 7-7.5% per annum, ”said Karpunin.

Elevation course

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 cheaper during trading on the Moscow Exchange.

Thus, the dollar rose by 0.37%, to 60.02 rubles, and the euro by 0.19%, to 59.9 rubles.

As Vladislav Antonov, a financial analyst at BitRiver, told RT, a decrease in the key rate of the Central Bank usually negatively affects the dynamics of the national currency in the long term.

At the same time, according to Antonov, the determining factor for the ruble in the foreseeable future should be the restart of the budget rule. 

“Trading volumes in the currencies of unfriendly countries have decreased.

The dollar and the euro cost about 60 rubles each - the difference between these currency pairs is now minimal.

Market participants ignore the external background and the decline in oil prices, as they are waiting for the updated parameters of the fiscal rule.

Everyone needs this to understand where to expect the ruble exchange rate by the end of the year,” Antonov said.

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Recall that earlier, in accordance with the budget rule, the state directed oil and gas windfalls (money received from the sale of oil at a price above $44.2 per barrel) not for current spending of the treasury, but for the purchase of foreign currency in the National Welfare Fund (NWF).

The authorities have used this practice in recent years to protect the budget and the ruble from fluctuations in oil prices.

At the same time, in early March 2022, the Ministry of Finance suspended the work of the budget rule due to sanctions and a sharp weakening of the ruble.

At that moment, it was assumed that all oil and gas revenues that would previously have gone to the NWF would now be spent on supporting the economy.

However, many sectors were able to quickly adapt to new conditions, and the ruble strengthened noticeably, which began to negatively affect budget revenues.

Against this background, the authorities thought about a possible restart of the budget rule to make the national currency cheaper.

“The launch of foreign exchange interventions within the framework of the budget rule may lead to a weakening of the ruble by 7-10% relative to established levels.

The depreciation of the ruble, in turn, can become a pro-inflationary factor, ”Mikhail Shulgin, head of the Otkritie Investments global research department, told RT.

According to Vladislav Antonov, until the end of September, the dollar and euro may continue to fluctuate in the corridor of 59-61.5 rubles.

Meanwhile, Vasily Karpunin admitted that by the end of the year, the values ​​will rise above this range.

“The balance of payments will play the main role in exchange rate formation.

In general, on the horizon until the end of the year, we still have expectations of a weakening of the Russian currency.

According to our forecasts, the cost of the dollar and the euro on the Moscow Exchange may rise above 65 rubles, ”concluded Karpunin.