The key rate of the Central Bank at an extraordinary meeting of the Board of Directors was increased to 12% per annum

The key rate of the Bank of Russia at an extraordinary meeting of the Board of Directors was raised to 12% per annum. This, as the Central Bank suggests, is enough for inflation to return to 4% in 2024 in the absence of new shocks, so the regulator did not give information about what will happen to the rate on September 15 at the next meeting of the council. Commenting on its decision, the Bank of Russia did not go into discussions about the nature of the relationship between the ruble exchange rate, inflation, imports and credit dynamics. In any case, if the exchange rate strengthens significantly in the near future, this will not be a direct consequence of the new rate level.

The question of why the Bank of Russia decided to convene an extraordinary meeting of the Board of Directors at the key rate will remain unanswered for quite a long time: commenting on the decision to increase the rate from 8.5% to 12% per annum, the Central Bank did not disclose what kind of additional information forced him to break the schedule of meetings. The formal explanation goes like this: “Inflationary pressure continues to increase. As of August 7, annual inflation increased to 4.4%. At the same time, the current rate of price growth continues to accelerate. 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%. It is difficult to assume that the trigger for the Central Bank was the absence of even signs of the August “fruit and vegetable” deflation in early August – the rest of the data were known at the time of the last regular meeting of its board of directors.

A commentary by the Central Bank that followed a little later described the same mechanism for accelerating the mutual influence of increased demand, import volumes and demand, which was mentioned in recent publications and speeches by representatives of the Bank of Russia with the proviso: the change in the rate level corresponds to “the increase in sustainable inflationary pressure that has occurred, the impact on it and inflationary expectations in terms of exchange rate dynamics. In other words, it was the weakening of the ruble that created additional pro-inflationary risks. The Central Bank, quite rightly, did not go into the question of what is primary and what is secondary in this effect, and prefers to consider the upcoming acceleration of inflationary expectations (which in Russian reality, apparently, is really strongly connected with the US dollar — imports of the 1990s) as a given, which should be reacted to in advance.

We note that the rate decision itself does not necessarily stabilize the foreign exchange market – in any case, the Bank of Russia’s observations of time lags in the complex mechanism of monetary policy transmission show that they have become larger than a year ago.

The current stabilization of the exchange rate is only a stabilization of market expectations and taking into account their assumptions about how the new rate level will affect the dynamics of credit, domestic demand, and through it, the demand for imports and indirectly the exchange rate.

By themselves, these events should probably occur no earlier than the first quarter of 2024. In the process, the situation with the balance of payments may improve and the true size of the budget deficit in 2023 will become clear, which may turn out to be lower than current forecasts by autumn, and the decision of the Bank of Russia may add additional impetus to the possible strengthening of the ruble. In any case, the decision of the Central Bank on the rate did not cause an immediate recovery of the ruble exchange rate, while the new rate level has already been taken into account by both the stock market and banks.

Meanwhile, the decision of the Central Bank to raise the rate by 350 basis points, in contrast to previous changes at the level of 25-50 basis points, is able to change a lot – and, first of all, to reduce the very rapid growth of credit in the Russian economy, which largely ensures rapid growth. import. According to the logic of the Central Bank, the rate increase is enough for “such dynamics of monetary conditions and domestic demand as a whole, which are necessary for inflation to return to 4% in 2024.”

In the comments of the Bank of Russia, there is no indication of what decision the board of directors can make on September 15. Formally, the rate can be lowered, raised, and kept — everything, apparently, will depend on how financial markets react to a strong rate increase in the coming weeks: there simply will not be an instant change in price dynamics, and inflation expectations are measured with a frequency higher than once a month, there will be no Central Bank, and at the meeting in September, the Central Bank will deal only with the August data of the FOM, “taken” at the peak of the beginning currency panic. For the Central Bank, it hardly makes sense to keep the rate at a two-digit level for more or less long: long-term “protective” bank rates for loans in a number of cases are able to activate independent pro-inflationary factors.

The Central Bank, however, officially allows an increase in the key rate “in the event of an increase in pro-inflationary risks” (the wording does not exclude an increase in September) – this is likely to be possible if these risks are created by the continued devaluation of the ruble. According to Bloomberg, new meetings were held in the government on Tuesday and planned for the future to discuss the possibility of independent measures to limit currency volatility – in the area of ​​​​limiting capital movements, however, according to these data, no such decisions were made. In any case, it would not be easy to accept them – now they can only consist in restricting imports, which in the current conditions is able to strengthen the ruble, but will reduce investment activity and direct excess demand, now focused on imports “at any price”, to the domestic market, That in itself will not limit inflation.

Dmitry Butrin