The Central Bank kept the rate at 7.5% in June

The issue of raising the key rate and its scale has been postponed to the second half of July – this is a summary of the decision of the Board of Directors of the Bank of Russia. The rate of 7.5% can only stand, apparently, in the event that the Central Bank does not expect a slowdown in the recovery of consumer demand, credit activity, and, as a result, inflation. The economic results of the spring, more or less strong, do not give grounds for such expectations. Price pressure will only be eased by new agricultural successes in 2023 or by the strengthening of the ruble in the summer – both are possible, but not guaranteed. Meanwhile, the decision of the Central Bank not to raise the rate for the sixth consecutive time further activates the credit market.

The probability that the Board of Directors of the Bank of Russia will raise the key rate at the last meeting may have been greatly underestimated by analysts. Although the decision itself – to keep it at the level of 7.5% per annum – was predicted, the content of the “signal” of the Central Bank turned out to be unexpectedly clear. According to Elvira Nabiullina, Chairman of the Bank of Russia, the council discussed options for increasing the rate by 0.25-0.75%. In such a situation, the “middle” solution usually wins.

Nevertheless, the consensus was in the direction of keeping the rate at the current level until the next meeting on July 21 and on a sharp tightening of the “signal” itself.

Its content can be translated as follows: if current trends continue, in a month and a half the Central Bank will discuss only raising the rate or, alternatively, maintaining it (the option of reducing is not visible), in the future, the picture is the same. The fact that the likelihood of an increase in the key rate since the May meeting has increased (and then it was already considered high) is stated in the communications of the Bank of Russia in plain text.

Probably the main reason for a new pause in raising the rate is the lack of a direct need to do it right now and the almost non-existent risks for such a pause: it will change little by itself. Of course, the decision to keep the rate at the level of 7.5% per annum, despite the fact that the statement of the Central Bank states some easing of monetary conditions (in the review of the Bank of Russia about them, published on Friday, these circumstances are described in detail – de facto, the May easing is quite smooth and of little significance to the markets) is an action that will slightly, but still further strengthen the recovery of the credit market. In May, the rates of both corporate lending (a ten-year high) and end-use lending were growing (but the share of loans with floating rates is also growing – already in April 2023 it was 43%).

However, the question of what is the actual “reference point” for determining the softness or rigidity of monetary conditions will be resolved only by the end of summer, during the review of the monetary policy (MP) of the Central Bank and the preparation of the “Guidelines for the monetary policy”. In August, the Bank of Russia will already determine what will be such a “point” – a new range for estimating the neutral rate. Elvira Nabiullina said quite definitely on Friday that this range will grow.

By July 21, the Central Bank will already have more reliable grounds for considering the current monetary policy as soft, the rate level as a little understated, and, as a result, to raise it in July or at the end of summer.

By itself, the rise does not promise to be large-scale. The consensus forecast of analysts published by the Bank of Russia on the rate level at the end of 2023 is 8% per annum (and an average of 7% for 2024), approximately the same expectations are calculated from the ROISfix market indicator for December. It almost does not matter whether the Central Bank raises the rate in the summer to 7.75% or to 8% per annum, the regulator expects the peak of inflationary pressure in December 2023 – early 2024. Thus, at the end of July, the Board of Directors of the Central Bank will have a fairly simple choice: if everything goes as it is now, it will be possible either to slightly (within 50 percentage points) raise the rate “in advance”, or – and here, apparently, the key the scale of food deflation in the summer of 2023 will play a role; will be, along with a statement of a significant weakening of monetary conditions, a more reliable basis for this step. In any case, the question of when the Central Bank will raise the key rate is less and less important, as it becomes more and more clear that the scenario of a strong rate hike before the end of 2023 is practically unrealistic.

On the contrary, a situation in which there will be no rate hike at all or it will amount to a symbolic 0.25% in the coming months is not unrealistic. Deputy Chairman of the Central Bank Alexei Zabotkin on Friday drew attention to the fact that the current weakening of the ruble – a pro-inflationary factor, of course – makes sense to “count” not for the last six months (weakening at the level of 25-30%), but by the beginning of 2021: from the beginning of the war operations of the Russian Federation in Ukraine, which remains the main and main cause of all the processes taking place in the economy, the ruble weakened by 11% against the US dollar, by 5% against the euro, and by 3% against the yuan. Most analysts’ calculations based on the balance of payments data show that the ruble is most likely now below the possible equilibrium level. Both a strong harvest in 2023 and some strengthening of the ruble can be factors in reducing inflationary pressure and the reason for new pauses in changing the Central Bank rate.

At the heart of the decision of the Bank of Russia to increase certainty for the market in its intention to slightly tighten monetary policy is the same mechanism as before.

The recovery of economic activity in the Russian Federation in most industries is going faster than expected by the Central Bank. In particular, and this is recognized in the regulator’s statement, faster than expected in the April forecast of the Bank of Russia.

The previously accumulated deferred demand is being realized right now, although not in full, the Russian issue cannot quickly provide an adequate supply for this demand, as well as rapidly recovering exports. Two more processes – the reorientation of demand in the economy from external to internal and the ever-increasing shortage in the labor market – make the persistence or even increase in inflationary pressure almost inevitable, albeit relatively short-term. We note, however, that in comparison with the beginning of the year, medium-term forecasts are becoming less certain: while the scenario for the second half of 2023 is almost certain, the prospects for 2024 are somewhat less obvious.

Dmitry Butrin