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For the fourth time in a row: Bank of Russia keeps key rate at 7.5% per annum

The Central Bank of Russia for the fourth time in a row has kept its key rate at 7.5% per annum. Such decision was made by the Board of Directors of the Central Bank at the end of its meeting on Friday, March 17.

According to the regulator’s estimate, in February the annual inflation rate in the country dropped to 11% compared with January’s 11.8%. At the same time, the Ministry of Economic Development estimated that by mid-March the growth of consumer prices slowed to 7.65% in annual terms. 

“The current rate of increase in prices remains moderate, in including some of the sustainable components. Inflationary expectations of the population decreased significantly, but remain at an elevated level, as are the price expectations of enterprises,” the Central Bank said in a press release.

At the same time, according to the regulator, the recovery of economic activity in Russia continued in the first quarter of 2023. Despite a some deterioration in external conditions, business sentiment remains optimistic as a result of expanding domestic demand, added the Central Bank.

On the eve of the improvement in the economy President Vladimir Putin said. According to him, the positive trends “are currently gaining strength” and already in the second quarter of 2023 the GDP of the country may show a “significant increase” compared to the same period of 2022.

In addition, the growth rate of retail trade in Russia could grow to 5% in April due to the revival of domestic demand, Putin added. As the head of state explained, the consumer activity of citizens is increasing against the background of a stable labor market, increasing wages and incomes of citizens, as well as lower inflation.

“It is expected that inflation will be less than 4% at the end of March. Different experts have different opinions… Some say 4%, some say less, some say 5%. In that vein or so. But it is clear that this will be the target inflation,” said the president.

The level of the key rate at the March meeting was largely expected, said investment strategist of the Asset Management Company “Arikapital” Sergey Suverov. According to the specialist, today the Central Bank has no serious reasons to revise its monetary policy (MP).

“Although inflation is now slowing down, recently we have seen some weakening of the ruble, due to which there is again a risk of acceleration of price growth. In this regard, a rate cut seems inexpedient for the time being. On the other hand, we should not raise the rate now either, because in this case the lending market will suffer, which will be a negative factor for some industries,” explained Suverov.

We will remind, traditionally change of MAP is considered as one of the main tools of the Central Bank for control of inflation. In case of rush growth of prices the regulator raises the rate, as a result of which borrowed money becomes more expensive for citizens and businesses, economic activity weakens and price pressure decreases. If, on the contrary, inflation slows down, the central bank may lower the rate to revive business and consumer activity.

In the spring of 2022, amid unprecedented Western sanctions against Moscow, inflation in Russia began to rise sharply and at a certain point approached 18% – the first time in 20 years. As an anti-crisis measure, the Central Bank more than doubled its key rate (from 9.5% to a record 20% per annum), which for some time slowed the growth of prices.

In summer inflation in the country dropped below 15%, and at the end of the year it was about 11.9%, which was even better than predicted by the authorities. As the price pressure was easing, the Central Bank started to gradually lower its key rate. In June the regulator brought it back to the pre-sanctions level of 9.5%, and in September it was reduced to 7.5% per annum, and has continued to do so ever since.

The next meeting of the Central Bank’s Board of Directors is scheduled for April 28. According to the press release of the regulator, in the future the Central Bank will make a decision on the key rate taking into account the dynamics of inflation, the process of structural adjustment of the economy, as well as assessment of internal and external risks.

“At strengthening of proinflationary risks, the Bank of Russia will assess the advisability of raising the key rate at the next meetings. According forecast of the Bank of Russia, with taking into account the ongoing monetary and credit policy, the annual inflation will be 5-7% in 2023 and will return to 4% in 2024,” – stated in the Central Bank.

According to Denis Popov, chief analyst at Promsvyazbank, there is a chance that inflation will start to gradually accelerate again in the second half of the year amid a further rebound in consumer demand and a moderate weakening of the ruble. This, in turn, may affect the actions of the Central Bank, says the expert.

“According to our estimates, by the end of March the annual rate of inflation will indeed fall to 4%, and in the second quarter it may go even lower. Nevertheless, the risk of accelerating inflation in the second half of the year is real and, according to our forecast, by the end of 2023 it will be about 7%. So we expect at least the key rate to remain at the current level of 7.5% until the end of the year,” Popov told RT.

As suggested in a conversation with RT, Albert Koroev, head of the Department of Stock Market Experts “BCS World Investment”, if necessary, the Central Bank may still go back to tightening its monetary policy. However, according to the expert, by the end of 2023 the key rate is unlikely to rise above 8%.

At the time of the announcement of the results of the meeting of the Board of Directors of the Central Bank, the Russian currency was slightly depreciating in trading on the Moscow Stock Exchange. Thus, the dollar rate rose by 0.35%, to 76.67 rubles, the euro – by 0.3%, to 81.42 rubles, the yuan – by 0.18%, to 11.11 rubles.

Typically, changes in monetary policy of the Central Bank affect the attractiveness of ruble assets. For example, in the case of a decrease in the key rate, the yield of federal loan bonds (OFZ) decreases. As a result, investors find it less profitable to invest in these securities and the outflow of capital from the OFZ market increases, which negatively affects the ruble. The opposite situation can usually be observed if the Central Bank raises its interest rate.

“So, in order for the ruble to react to the Central Bank’s decision, the rate should be raised or lowered, but this has not happened. The national currency now depends more on the geopolitical situation and the state of the trade balance than on the actions of the Central Bank,” said Sergei Suverov.

In addition, as BitRiver financial analyst Vladislav Antonov told RT, in recent days some pressure on the Russian currency has reduction of world oil prices. Under these conditions, the expert does not exclude that the dollar exchange rate may go up to 80 rubles before the end of March, the euro exchange rate – to 83 rubles, and the yuan rate – to 11.3 rubles. However, according to the forecast by Albert Koroev, the values may fall to 74, 78 and 10.7 rubles, respectively, throughout the spring.

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