The Central Bank of Russia did not raise the key rate and kept it at 16% per annum. The leadership of the Central Bank made this decision on Friday, February 16, following the results of the first meeting in 2024.

According to the regulator’s assessment, inflation pressure in the Russian economy has decreased compared to the autumn months, but still remains high. Thus, at the moment, the growth rate of consumer prices for goods and services in annual terms remains close to the levels of the end of December and as of February 12 amounted to 7.4%.

“Domestic demand continues to significantly outstrip the possibilities for expanding the production of goods and services. It is premature to judge the sustainability of the emerging disinflationary trends. The monetary policy pursued by the Bank of Russia will consolidate the process of disinflation in the economy,” the Central Bank said in a press release.

According to Central Bank experts, due to the ongoing monetary policy (MCP), by the end of 2024, the annual inflation rate may drop to 4-4.5%. At the same time, in the future, price growth should slow down to the target 4% and remain near this mark, the regulator predicts.

Traditionally, changes in monetary policy are considered one of the main tools of the Central Bank for controlling inflation. In the event of a noticeable rise in prices, the regulator increases the rate, and, as a result, loans in the country become more expensive, and the profitability of bank deposits increases. As a result, households and businesses begin to take out loans less frequently, spend less and save more, overall economic activity declines, and after a certain time, price pressure should weaken.

If inflation slows down, the Central Bank may, on the contrary, return to lowering the rate. This, in turn, should once again lead to a revival of business and consumer activity.

“So far, there is no stable trend towards slowing inflation, since the effect of the measures already taken to tighten monetary policy has not yet been fully realized. This will take some more time,” Ilya Fedorov, chief economist at BCS World of Investments, noted in a conversation with RT.

Olga Belenkaya, head of the macroeconomic analysis department of the Financial Group Finam, shares a similar point of view. In her opinion, taking into account recent trends, the regulator’s monetary policy will continue to remain tight in the coming months.

“The Central Bank is still concerned about high inflation expectations of the population and business, a shortage of labor and, as a consequence, an increase in wages in a number of industries, as well as investment demand from enterprises, supported, among other things, by government orders. To compensate for all these pro-inflationary risks, the Central Bank considers it necessary to maintain the rigidity of the monetary policy,” explained RT’s interlocutor.

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Let us recall that back in the spring of 2022, after the start of the SVO and the introduction of Western sanctions, inflation in Russia rose to almost 18% for the first time in 20 years. Then the Central Bank raised the key rate from 9.5 to a record 20% per annum, and the government adopted a set of anti-crisis measures, which after some time made it possible to stabilize the situation in the economy and slow down price growth.

Thus, by the end of 2022, inflation in the country had fallen below 12%, and the Bank of Russia, against this background, moved to easing monetary policy. First, the regulator gradually returned the rate to the pre-sanction 9.5%, and then lowered it to 7.5%.

By May 2023, consumer price growth slowed to 2.3% in annual terms. However, after this the figure began to grow noticeably again and in the fall was approaching 7.5%.

As the Central Bank explained, against the backdrop of a strong economic recovery, at a certain point, the growth of domestic consumption began to exceed the possibilities for expanding the production of goods and services, as many enterprises faced a shortage of personnel. At the same time, the demand for foreign currency in Russia increased, and its receipts from exports decreased, which resulted in sharp exchange rate fluctuations. All this led to an acceleration of inflation.

In an attempt to curb price growth, the Bank of Russia again began to tighten monetary policy in mid-summer. In July, the regulator increased the key rate from 7.5 to 8.5%, in August at an unscheduled meeting it raised it to 12%, in September it increased it to 13%, in October - to 15%, and in December - to 16% per annum.

“Taking into account the impact of preferential mortgage programs and the current situation on the labor market, the increase in the key rate by more than doubling over the past six months looks justified. With a less stringent monetary policy, lending growth rates would be higher, which would lead to an additional increase in consumer demand, and therefore to even higher inflation,” PSB Management Company analyst Evgenia Nesterenko explained to RT.

Hoping for a decline

The next meeting of the Board of Directors of the Central Bank is scheduled for March 22. As the Central Bank stated, to return inflation to the target 4%, monetary conditions will have to be kept tight for a long time. However, according to the regulator’s forecast, already in 2024 the key rate may fall below the current level, and its average value will be 13.5-15.5%.

If inflation begins to decline in the near future, the Central Bank may move to easing monetary policy as early as the second half of the year, says Evgenia Nesterenko. However, in her opinion, by the end of 2024 the key rate is unlikely to fall below 11% per annum. Leading analyst at Digital Broker Daniil Bolotskikh gave a similar forecast to RT. At the same time, the specialist did not rule out that the rate reduction could begin in the spring.

“According to our neutral scenario, by the end of the year the key rate should drop to 11%. The main factor that will contribute to the revision of monetary policy will be a sustainable decline in inflation. Moreover, the regulator will be able to begin easing monetary policy closer to the second quarter,” Bolotskikh suggested.

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Olga Belenkaya also admits the possibility of a spring rate cut. According to her assessment, with positive dynamics in consumer prices, the regulator may announce the beginning of easing monetary policy at a meeting in April.

“Nevertheless, another scenario is possible. If the mixed inflation picture and the dynamics of the components influencing it persist, the first rate cut can be expected only in June or July. If events develop optimistically, the rate could be reduced to 10-11% by the end of the year, and if events are less favorable, to 12-13%,” added RT’s interlocutor.

Stimulus for the ruble

The Russian currency practically did not react to the decision of the Board of Directors of the Central Bank to maintain the key rate. Thus, in the first minutes after the announcement of the results of the meeting, the dollar exchange rate on the Moscow Exchange continued to fluctuate in the range of 92.5-92.7 rubles, the euro exchange rate - within 99.2-99.5 rubles, and the yuan exchange rate - around 12.7 rubles.

Note that, while maintaining a strict monetary policy, loans remain expensive, businesses begin to purchase foreign goods less frequently and, accordingly, purchase foreign currency in smaller volumes, which has a positive effect on the dynamics of the ruble. At the same time, the high profitability of bank deposits makes storing money in rubles more profitable compared to dollars, euros and yuan, and this also contributes to the strengthening of the national currency.

“The high key rate certainly has a positive impact on the ruble exchange rate, retaining almost 40 trillion rubles of individual deposits in the financial system. Otherwise, money would have flowed more actively into the currency and stock markets, as well as into real estate. I think that in the near future the exchange rate will not deviate much from the budgeted 90 rubles per dollar,” suggested Ilya Fedorov.

In addition to the Central Bank rate, one of the determining factors for the ruble remains the volume of sales of foreign currency earnings by exporters, says Evgenia Nesterenko. Let us remind you that today a number of large companies must return at least 80% of dollars, euros and yuan earned from abroad. Moreover, at least 90% of the transferred funds to the business must be exchanged for rubles. This initiative was approved by President Vladimir Putin back in October to strengthen the national currency.

In addition, the Central Bank and the Ministry of Finance, within the framework of the budget rule, also exchange part of the foreign currency from the National Welfare Fund into rubles. This should also keep the dollar, euro and yuan rates from rising sharply, says Daniil Bolotskikh.

“We do not expect sharp exchange rate fluctuations until March. We predict fluctuations in the range of 88-95 rubles per dollar, 95-101.4 rubles per euro and 12.3-13 rubles per yuan,” the analyst concluded.