The Bank of Russia sees reasons for an additional increase in the key rate on September 15

The probability of raising the key rate at the meeting of the Board of Directors of the Bank of Russia on September 15 is high, although the option of maintaining it, apparently temporary, remains relevant. This is the main conclusion of the discussion at the conference of the Central Bank dedicated to the decade of its work as a mega-regulator. The risks of a new inflation surge with a rate of 12% per annum have not been completely removed, and the markets may not see a significant and rapid rate cut in the coming months.

Conference, dedicated decade of the Bank of Russia as a mega-regulator (monetary policy, banking supervision and control over the financial sector), with the participation of key regulators and participants in the financial market, it was supposed to discuss the fundamental consequences of its creation back in 2013. However, market issues – the exchange rate of the ruble, the impact of the decision of the Bank of Russia at an extraordinary meeting of the Board of Directors on August 15 increase in the key rate from 8.5% to 12% per annum on financial markets, the future level of the rate – outperformed “long-term” topics very appropriately: in fact, it is in such periods as the summer of 2023 that the pros and cons of long-term solutions and the real possibilities of a mega-regulator are best clarified and the restrictions imposed on them by the hierarchy of its priorities.

The comments of the head of the Bank of Russia Elvira Nabiullina on the current situation during the conference and on its sidelines significantly supplemented the explanations of the Central Bank of the August 15 decision.

Formally, the head of the Central Bank did not give new information about what options for the key rate are possible for discussion on September 15: according to her, both options cannot be ruled out – maintaining the rate at the current level and raising it.

But the logic proposed by Mrs. Nabiullina, clarifying the disposition before the next meeting, is not obvious. Thus, the Central Bank insists on the existence of an asymmetry between raising and lowering the rate. The regulator (and this applies to the advice on September 15) may reduce the rate level if a steady decline in inflationary risks is recorded. Since the weekly inflation statistics of Rosstat are of secondary importance in this matter, and the August inflation, although it does not show a rapid acceleration, at least did not decrease (although there are still chances of a formal deflation for a week or two), there is no de facto chance of a rate cut in September even in the event of a sharp decline in inflationary sentiment.

There are still chances to keep the rate at 12% in September. According to Elvira Nabiullina – and this was not said directly before – the August level of the rate increase, in contrast to the “protective” decisions of 2022 on it, does not contain a deliberate and known excess of the Central Bank from the indicators that would ensure inflation in the models of the Bank of Russia calculated trajectory “without margin”. In other words, the rate of 12% per annum, according to the Central Bank, is not in any sense “protective” – ​​this is the level that is considered to be exactly in line with the growth rates of inflation and monetary aggregates as of the first half of August.

The second half of August did not give new information about what will happen to prices in the future. However, the head of the Central Bank presented a possible explanation for the alleged additional rate hike in September – bank lending practically did not react to the rate increase by 350 points in two weeks, that is, there was no immediate market reaction to the signal given by the Bank of Russia in August. However, based on this statement, we can assume that even if the last week of August is very unfortunate for inflation (especially in stable components), the scale of the additional increase in the Central Bank rate is very limited.

And, finally, a discussion of exchange rate volatility with the participation of Finance Minister Anton Siluanov showed that the Central Bank does not formally deny the stabilization of the exchange rate as a secondary goal of raising the rate in August, but is waiting for this effect with significant time lags.

At the same time, Anton Siluanov stated that if earlier the Central Bank was more conservative in matters of capital movement restrictions than the Ministry of Finance, now the roles have changed: the Bank of Russia insists that exchange rate stabilization will be the result of monetary policy, the Ministry of Finance is more likely to limit and abolish easing in 2022–2023 on the repatriation of foreign exchange earnings in the Russian economy, but so far the Central Bank’s point of view is winning.

No less important is the statement made by Elvira Nabiullina about the unacceptability of the policy of managing the money supply by measures of macroprudential regulation for the Bank of Russia. According to the head of the Central Bank, this is both irrational – capital flows between banks cancel the potential effect of a decrease in total profit in the banking system – and it makes no sense, since general restrictions, for example, on consumer lending outside the monetary policy are unworkable and on the pace of M2 dynamics (i.e. inflation) will not be affected.

Thus, “quick” rate decisions on September 15 are practically out of the question — apparently, the Bank of Russia is ready to either keep the rate level until October-November (when the pressure from budget spending is likely to increase pro-inflationary factors), or raise it by 0 .5–1 percentage point if new data emerge in the next two weeks about a further increase in unsatisfied demand in the economy, pressure on the ruble and other events that worry the Central Bank based on super-positive economic sentiment in the markets.

Dmitry Butrin