The Central Bank upheld the key rate: why Nabiullina “mothballed” it

The key rate has remained unchanged for more than six months. It has been at the level of 7.5% since September 16 last year. The key benchmark for key rate decisions is always inflation, and by April 24 this figure had fallen to a record low of 2.46%, according to Rosstat. However, neither such optimistic statistics, nor the calls of representatives of the real sector of the economy to lower the key rate, making lending more accessible, inspired the Board of Directors of the Bank of Russia to soften the policy. The reasons for this attitude of the regulator and the consequences of his decision for the wallet of Russians, “MK” discussed with experts.

Natalia Milchakova, Leading Analyst at Freedom Finance Global: “The Central Bank of the Russian Federation has long warned that the sharp decline in annual inflation in March and April may be temporary, and a short-term surge in prices is expected again in May and early summer. At the same time, geopolitical risks remain high. The price of Brent oil has fallen below $80 per barrel, and the ruble is still unstable.

Based on all these factors taken together, it turns out that there are no grounds for raising the key rate, but it is too early for the Central Bank to return to lowering the rate, even despite optimistic inflation indicators and pressure from industrialists. Most likely, the reduction of the key rate can be expected no earlier than the second half of this year, given favorable developments in the economy.

There will be no significant changes for borrowers and savers. However, banks may interpret such a decision of the regulator in their own way: as the absence of a reason to reduce interest rates on loans. Moreover, at the beginning of the year, a number of large banks significantly softened the conditions for unsecured loans and mortgages. If the interest rate on loans does not go down, borrowers will certainly not be happy.

But if deposit rates do not decrease at the same time, then depositors, at least, have no reason to worry too much. The ruble can react to the decision of the regulator in any way, and, most likely, the currency market will focus not on the decision, but on the nature of the accompanying comments and forecasts. We expect the dollar to be within 80-82 rubles by the end of the week.”

Alexey Fedorov, TeleTrade analyst: “Maintaining the key rate is a compromise between a temporary decline in inflation in April below 3%, which should push the Central Bank to reduce the interest rate, and increased risks of inflationary pressure due to the depreciation of the ruble in the last 5 months on the cost of imports.

So, despite the pressure exerted on the regulator to ease the conditions of monetary policy, the Bank of Russia left the key rate unchanged at 7.5%, and for its possible reduction, in the event of an unexpected stabilization of inflation in the region of 3-3.5 % will provide for a meeting of the Board of Directors, which will take place on June 9 or even July 21.

For the Russian economy, such a decision does not change anything at all. Credit and deposit interest rates in Russian banks will remain at their current values. As for inflation, a key rate that is significantly higher than the annual rate of price growth, as a rule, has an additional disinflationary effect.”

Roman Chechushkov, Head of Investment Analytics at Renaissance Bank: “The Central Bank kept the base rate at 7.5%, because, firstly, inflation expectations of the population for the year ahead, according to the inFOM survey, decreased in April 2023. The median estimate of inflation expected in the next 12 months was 10.4% (against 10.7% in the previous forecast), and 9.9% for five years ahead.

Secondly, inflation fell below 2.5% in April, which should suit the Central Bank of the Russian Federation. The weakening of the ruble slowed down in April, the current exchange rate has not yet had a significant impact on prices.

However, despite the slowdown in inflation in annual terms, monthly data indicate an acceleration in price growth: in March, seasonally adjusted price growth amounted to 0.29% against 0.27% in February. Growing budget expenditures may also become the main pro-inflationary factor in the medium term. Based on the combination of these factors, it was probably decided to keep the key rate at 7.5%.

Since the key rate remained unchanged, we assume a moderate increase in lending rates, which is associated with an increased risk of a deterioration in the creditworthiness of the population in the short term. The weighted average interest rate on loans to individuals issued for a period of more than 1 year was 12.45% in February, thus, since the key rate was reduced to 7.5% in September 2022, rates on loans to individuals increased by 0.65% .

The weighted average housing lending rate is also growing: since September 2022, it has increased by 1.4%, amounting to 8.1%. Mortgage rates may continue to grow due to the tightening of mortgage lending regulation by the Bank of Russia: from May 1, 2023, an increase in risk factor premiums will come into effect.

Despite the slowdown in inflation in March-April, prices will continue to rise. This is facilitated by currency fluctuations, a decrease in the trade balance with Western countries and the transition from a savings to a consumer behavior model of the population.

We expect the dollar exchange rate to be at the level of 76-80 rubles, and the euro exchange rate within the range of 87-92 rubles on the monthly horizon.”