Consensus: the Central Bank on July 27, will keep the key rate at 7.25%


MOSCOW, July 26. / The Bank of Russia at the meeting of the Board of Directors on July 27, will keep the key rate at the current level of 7.25% per annum, respondents believe experts.

According to them, the regulator will keep a pause in further monetary easing until at least the end of this year, with a maximum of up to the third quarter of 2019.

Analysts attribute this to the fact that the Central Bank needs to assess the impact on inflation and inflationary expectations given the planned increase of VAT from 18% to 20% from 1 January 2019. At the previous meeting, on 15 June, the Central Bank kept its key rate at 7.25% and revised up the inflation forecast given the proposed increase in VAT. According to experts, in the rhetoric of the Central Bank since then nothing has changed.

The expected solution

Analysts agree that the Central Bank very clearly told the market its position at the last meeting: to further reduce the rate you want to track how inflation and inflation expectations after the news of the imminent VAT increase.

“We think that there will be no change. The last time the Central Bank has made it clear that in the near future to change the rate is not planning, but absolutely nothing since the last meeting has not changed. Most likely, following the rate reduction, if possible, in the third quarter of next year. The rate is now very close to the neutral range, especially after the last strengthening of sanctions in April, when we increased the risk premium,” said chief economist IK “the Renaissance the Capital” in Russia and the CIS Oleg Kuzmin.

In addition, the rhetoric of the Bank since 15 June has not changed, said the Director for analysis of financial markets and macroeconomics UK “Alfa-Capital” Vladimir Bragin. “Judging by the recent attitude of the Central Bank, most likely, the key rate would not come down. In principle, the market is already accustomed to the fact that the Central Bank unless absolutely necessary movements did not commit, and if something does, then it needs to be 100% sure. Now it’s unclear what impact the VAT increase, with crop news was that it might be lower than last year, so food inflation could be higher, but the Central Bank is likely to be cautious,” he said.

According to the Central Bank, the VAT increase will have an impact on the dynamics of consumer prices in 2019, and can also have an effect in the current year. In particular, the Bank of Russia forecasts annual inflation rate of 3.5-4% at the end of 2018, and its short-term improve to 4-4,5% in 2019. The regulator expects that the growth rate of consumer prices will return to 4% in early 2020.

“The balance of risks to the end of 2019 has shifted to proinflationary risks. The Bank of Russia will make the decision on the key rate, assessing the risk of inflation, inflation dynamics and the development of the economy in relation to the forecast”, – said in a release following the meeting of the Central Bank on June 15.

“At the last meeting, the Central Bank did not change rates, citing the increase in VAT in 2019. The government has announced its intention to raise the VAT total for the day before the meeting of the Central Bank. Thus, the regulator didn’t have time to properly assess the consequences for inflation and the economy as a whole” – the analyst of Sberbank CIB Nikolai Minko.

The potential of a rate cut

According to the results of the previous meeting, Central Bank Governor Elvira Nabiullina said at a press conference that the Bank of Russia now estimates of a neutral key rate closer to the upper boundary of the interval of 6-7%. She added that “at present we can not make those remaining one or two steps on the key rate, which would allow us to fully move to neutral monetary conditions.” According to experts, for the decision of the Central Bank in favor of reducing rates at least 25 basis points it remains to be seen how will inflation accelerated to the target level of 4% or higher.

According to Rosstat, from 17 to 23 July 2018 in Russia saw a zero growth in consumer prices and in annual terms inflation on July 23, was about 2.3%. While inflation expectations increased significantly and can have a lasting effect on inflation. In particular, in early July, the Central Bank has published its monthly estimate of inflation expectations according to which they increased to 9.8% – its highest level since July of 2017. An increase in inflation expectations was noted in response to the rise in price of petrol and the VAT increase in 2019.

In addition, the Department of studies and forecasting of the Central Bank presented its own assessment that the VAT increase will lead to inflation by 0.8-1.25% of the points.

“The experts also believe that inflation expectations may not yet have peaked. Thus, although the VAT increase is not a factor of monetary policy, it probably will have long-term inflationary effect through inflation expectations. Accordingly, analysts of the Central Bank come to the conclusion that the rate should be left unchanged as long as inflation does not reach the maximum that should happen next year,” commented the research Department of Bank Nikolay Minko.

In view of uncertainty concerning the further dynamics of inflation expectations and inflation, experts variously estimate the temporary pause that will take the Central Bank to lower rates. “We expected to keep the pause in the cycle to reduce the key rate of the Russian regulator and we expect it to resume in the coming months, while permissible in the absence of new external shocks and the seasonal slowdown of monthly inflation in August and September isolated easing (25 b.n.) at the end of the current year”, – says Director for analysis of the Bank “Opening” Dmitry Harlampiev.

“If you remember the rhetoric of the Central Bank since the middle of last year, it was a similar situation: the Central Bank expected that inflation will accelerate, but it never accelerated. At the end of 2017, he lowered the rate by 50 b.p. but did so when it revised its Outlook. While the Central Bank is satisfied that the fears that he expressed, in vain, major movements at the rate he will not do. May be this year one or two of decline, but before that I should seriously change the fed’s rhetoric,” – said Bragin.

Forecasts of the level of rates

  • Raiffeisenbank – of 7.25%;
  • IK “the Renaissance the Capital” – 7,25%;
  • JP Morgan – 7.25 per cent;
  • Sberbank CIB – 7.25 per cent;
  • Gazprombank 7.25 percent;
  • “FC Opening” – 7,25%;
  • BofA Merrill Lynch – 7.25 Per Cent;
  • Morgan Stanley – 7.25 Per Cent;
  • FG BKS – 7.25 PER CENT;
  • “VTB Capital” – 7,25%.

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