The Central Bank raised the rate to 12%

Based on the results of an extraordinary meeting on August 15, the Board of Directors of the Bank of Russia raised the key rate by 3.5 percentage points to 12% per annum. The last time the Central Bank raised the rate less than a month ago – by 1 percentage point at a meeting on July 25. Since September 2022, it has been at the level of 7.5% per annum. Analysts polled by Vedomosti expected a rate increase of 1-6.5 percentage points to 9.5-15%, attributing this to a steep depreciation of the national currency.

In a press release following the meeting, the regulator explained the rate hike as an attempt to limit risks to price stability. “The increase in domestic demand, which exceeds the possibility of expanding output, increases sustainable inflationary pressure and affects the dynamics of the ruble exchange rate through increased demand for imports. As a result, the pass-through effect of the ruble depreciation to prices is increasing and inflation expectations are growing,” the publication says.

As of August 7, annual inflation increased to 4.4%. On average, over the past three months, seasonally adjusted current growth was 7.6% on an annualized basis. The same indicator of core inflation increased to 7.1%, the Central Bank writes in a release. Going forward, maintaining the current rate of price growth at the achieved levels means a significant risk of inflation deviating upwards from the target of 4% in 2024, the regulator continues.

The Bank of Russia will make further decisions on the key rate, taking into account the actual and expected inflation dynamics relative to the target, the process of economic restructuring, as well as assessing the risks from internal and external conditions and the reaction of financial markets to them, the regulator also writes. The Central Bank maintains the forecast for the return of inflation to the target of 4% in 2024.

The regulator announced today’s meeting of the board of directors only the night before against the backdrop of a sharp weakening of the ruble. On Monday, August 14, at the auction on the Moscow Exchange, the national currency fell to the level of 101 rubles. per dollar and 111 rubles. for the euro for the first time since March 23, 2022. The exchange rate reversed sharply after the announcement of the Central Bank to hold an extraordinary meeting of the board of directors on the rate. As of 8:37 Moscow time, the dollar on the stock exchange costs 96.2 rubles, the euro – 105 rubles, the yuan – 13.16 rubles. Since the beginning of August, the dollar exchange rate against the ruble has increased by 5%, the euro – by 4.2%, the yuan – by 2.8%. Since the beginning of the year, the American currency has risen in price against the Russian one by 37.6%, the European one – by 41.3%, the Chinese one – by 32.8%.

The announcement of the meeting, and not the adoption of a decision on the day, gives a signal to market participants who began to bet on the weakening of the ruble and add demand for the currency, that this strategy will bring losses, Sergey Konygin, senior economist at Sinara investment bank, said the day before. An increase in the key rate will lead to an increase in the cost of loans, which will reduce consumer and investment demand, including for imports, Mikhail Vasilyev, chief analyst at the bank, explained. Also, the growth of yields on deposits and bonds will increase the attractiveness of ruble savings and increase the demand for the national currency, he notes.

Konygin believes that a noticeable strengthening of the ruble (from 5 rubles) can occur with an increase in the key rate to 15% or more. A less significant increase will not be able to stop speculators, since there is a stable demand for imports from large businesses and the state on the market, the economist is sure: private players stop importing goods with such a weak ruble exchange rate.

IN BCS expected that the Central Bank will raise the rate to 9.5-10%. An excessive increase is not required, since there are no financial stability risks, as was the case in February 2022 (then the rate was raised from 9.5% to 20%), said Vasily Karpunin, head of the information and analytical content department at BCS World of Investments. In Tsifra Broker they expected the rate to rise to 10%, in Promsvyazbank – up to 10-10.5%, in Sovcombank – up to 10-13%.

An increase in the rate at an extraordinary meeting of the Central Bank may help to partially win back the situation with the ruble, but the effect will be one-time, noted devalvatsii-i-chto-budet-s-rublem) Daniil Grigoriev, expert of the New Deal Association of Economists. If the authorities continue to proceed from the fact that the exchange rate of the ruble must remain floating, then this cannot be achieved without normal control of financial flows, he stressed.

Since the beginning of July, the Central Bank has cited a decline in exports and an increase in imports as the main reason for the weakening of the exchange rate. “We still consider the decisive factor (weakening of the exchange rate. – Vedomosti) to be what is happening in terms of exports and imports of goods and services,” said Alexei Zabotkin, deputy chairman of the Bank of Russia, on August 11. From his point of view, the flow of export earnings to the Russian market is now delayed, while imports are growing. In addition, the money supply is increasing. In other words, the amount of currency available for paying for imports in relation to the ruble mass is falling, resulting in a bias, the exchange rate is weakening, Zabotkin explained.

On Monday, August 14, Maxim Oreshkin, presidential assistant for economic affairs, blamed the devaluation of the ruble on the Central Bank and accused him of too loose monetary policy. “In the interests of the Russian economy, a strong ruble,” the official concluded.

Analysts polled by Vedomosti consider the decline in exports and growth in imports to be an unconvincing reason for the weakening of the domestic currency. The decrease in the trade balance is more likely a consequence of excessively loose monetary and budgetary policies, said Alexander Isakov, an economist at Bloomberg Economics.

The main problem of the ruble exchange rate is the pressure on the financial account through the outflow of capital, Pavel Ryabov, an economist and author of the Spydell finance Telegram channel, also believes. From the beginning of 2022 to the second quarter of 2023, the repayment of liabilities to non-residents amounted to over $135 billion, and the financial assets of residents in foreign currency increase by approximately the same amount.

Gazprombank economist Pavel Biryukov estimates the rate of capital outflow in the Russian economy at $3-4 billion per month. The outflow is formed in various ways: “under-transfer” of foreign exchange earnings by exporters, the conversion of foreign currency loans into rubles, the withdrawal of household funds, an increase in demand for foreign currency from friendly non-residents and continued sales of Russian assets by unfriendly non-residents, the expert listed.