How the increase in the key rate will affect the ruble exchange rate: experts gave a disappointing forecast

The Central Bank begins to tighten monetary policy: what could be the consequences

The Bank of Russia at the meeting of the Board of Directors on July 21 will almost certainly raise the interest rate. The fact that the regulator is ready to take such measures has already been stated by the head of the Central Bank Elvira Nabiullina. The last time the regulator made a similar decision was at the end of February 2022, when the news about the start of a special military operation in Ukraine caused a panic on the stock exchanges and led to the collapse of the Russian currency. Then an increase in the key indicator for the economy to 20% allowed the dollar to “cool down”, which went off scale for 120 rubles. Now the ruble, which has fallen in price by a third since January, again requires saving. Will the expected increase in the key rate help strengthen the national currency?

The previous increase in the key rate of the Central Bank from 9.5% to 20%, which took place at the end of February 2022, was an absolutely necessary measure. After the aggravation of the geopolitical situation associated with the events in Ukraine, investors and stock players lost confidence in the Russian currency. The dollar exchange rate at the moment rose above 120 rubles, and the euro – above 130 rubles. However, the then radical decision of the Bank of Russia on the key rate benefited the “wooden” one: by the end of April, a little more than 70 rubles were given for the “American”, and 74 rubles for the “European”.

Since then, the Central Bank at monthly meetings of the board of directors has either lowered the key rate or left the indicator unchanged. The level of 7.5% was recorded in September 2022 and has not changed since then. However, this year the economic picture is not in favor of the Russian national currency: if in January the dollar cost 69-70 rubles, now its rate exceeds 91 rubles. And the euro for six months has grown in price from 73-75 to 101-102 rubles. Obviously, the time has come to once again use the main weapon of the Bank of Russia – the key rate, since its “trampling” in one place every day only worsens the state of the Russian currency.

Central Bank Chairman Elvira Nabiullina recently confirmed that the regulator allows for an increase in the indicator, but did not specify whether such a decision would be a one-time decision or Russian market participants should prepare for a whole cycle of upward rate changes. Most likely, now the rate will increase by 0.5-1%, which will have a limited effect on the Russian currency. “The current exchange rate of the ruble is quite comfortable for budget execution, even taking into account the reduced revenues from oil and gas exports,” said Artem Klyukin, an expert at IVA Partners Investment Company. “Therefore, you should not expect that the regulator will decide on a fundamental change in the current situation, especially since, despite the weakening of the ruble, inflation does not show a significant acceleration.”

Moreover, many experts do not believe that key rate maneuvers can provide long-awaited support for the ruble. According to Natalya Milchakova, a leading analyst at Freedom Finance Global, the ruble exchange rate sometimes paradoxically reacts to the decisions of the Central Bank. “In 2016, the regulator began to reduce the key rate after the sharp rise in inflation that occurred at the end of 2014-2015 was brought under control. Then the Russian currency responded to the rate cut not by a collapse, as it should have been in theory, but, on the contrary, by strengthening, the expert recalls. “Now an increase in the indicator by tenths of a percentage point will lead to a short-term strengthening of the exchange rate: up to 89-90 rubles per dollar and up to 99-100 rubles per euro.”

The main reason for the low cost of the “wooden”, according to the investment strategist of the management company “Arikapital”, is the negative balance of payments, formed in the first half of the year. In January-June, the average amount of Russian import transactions amounted to $25 billion per month, which corresponded to the level of 2021, while export transactions brought only $34 billion per month, which is almost 20% less than the results of two years ago. “Currency inflows into the country are declining, which leads to an increase in the value of the dollar and the euro. At the same time, despite the policy of substituting foreign goods with domestic products, import volumes remain at the same levels. To strengthen the ruble, the economic bloc of the government first of all needs to balance the balance of payments, the expert believes. — An increase in the rate by 0.5-1% will not have a significant impact on the exchange’s assessment of the “wooden”. Returning the exchange rate to the level of the beginning of the year, when the dollar was worth 70 rubles, will only allow a sharp increase in the rate to at least 15%.