Only this will keep prices down
The economists we interviewed agree that, as inflation continues to accelerate, the Central Bank at the next meeting of the Board of Directors on July 23 will raise the key rate “in one fell swoop” – in the range from 0.75 to 1 percentage point. According to our interlocutors, only such a step, the most “hawkish” since December 2014, will allow to cool consumer demand and contain galloping prices.
Earlier, the Central Bank raised the rate on June 11 – by 0.5 percentage points to 5.5% per annum. At the beginning of the year it was 4.25%, and in March the regulator set a course for a smooth tightening of monetary policy, adding 0.25 percentage points to the rate. And if it were not for the June indicator of Rosstat on inflation, which, against the background of the rise in prices for vegetables and building materials, rose to 6.5% on an annualized basis (a record since 2016), the Central Bank could well have postponed the super-strict measures. But there was no longer any room for maneuver. In the April forecast of the Central Bank, inflation was expected at the level of 4.7-5.2% at the end of the year. It looks like the reality will be different due to a number of circumstances and risks.
For example, these include the June acceleration of inflation in the United States from 5% to 5.4% (the fastest growth since 2008), says Nikita Maslennikov, a leading expert at the Center for Political Technologies. According to him, this is fraught with a tightening of the monetary policy of the US Federal Reserve. And then the flight into dollars will begin on the world markets, the problem of corporate and sovereign debts will worsen. This will affect Russia as well, since the departure of non-residents and hot money from the country will provoke a weakening of the ruble. Which, in turn, will drive up domestic prices.
“The situation is pushing the Central Bank to take more decisive measures, to raise the rate by at least 0.75 percentage points,” Maslennikov argues. – If inflation is not suppressed now, the negative dynamics will drag on for an indefinite time and will hit the pockets of every citizen of Russia. In addition, all social obligations of the state, from pensions to benefits for the unemployed, will be at risk. “
FxPro financial analyst Alexander Kuptsikevich also expects an increase of 0.75 percentage points this Friday. According to him, the figure is already included in the market quotes, and the Central Bank does not like to shock investors too much, as this leads to surges in volatility. It is also important that the rate hike is a fairly effective way to slow down the pace of consumer lending. Obviously, banks will transfer this step of the regulator into their products, raising the rates on loans and deposits by a commensurate amount. As for the ruble exchange rate, it may well strengthen – against the backdrop of higher yields on government securities (OFZ) and the revival of buyers’ interest in the Russian debt market.
“The Central Bank will raise the key rate by one percentage point, from 5.5% to 6.5%,” predicts Alexander Razuvaev, head of IAC Alpari. “Inflation is now a headache for most regulators in the world, and Russia is no exception. It will be possible to bring it down to the target of 4% indicated by the Bank of Russia only in the second half of 2022. And at current levels of inflation, the rate should be 7–7.5% ”.
In addition, the situation when interest rates on deposits are lower than inflation, that is, depositors subsidize borrowers, is in principle unacceptable. For example, last year the Bank of Russia lowered its key rate to 4.25%, thereby causing a weakening of the ruble and a rise in prices. And for the ruble, the Central Bank rate is not the most important factor, Razuvaev notes. If the monetary authorities really wanted to strengthen it, the Ministry of Finance should simply refuse to buy foreign currency on the domestic market.
“The Bank of Russia can really raise the rate to 6.5%, since this is required by the dynamics of inflation,” says Artem Deev, head of the analytical department at AMarkets. – For the economy, this decision is quite expected and logical. It will lead to an increase in the cost of borrowed funds for both citizens and businesses. This, in turn, will slow down consumer demand and the pace of economic recovery. The ruble will get an additional chance to temporarily strengthen, the rates on bank deposits and loans will rise. The latter will become less accessible. “
Based on the data of Rosstat, the Central Bank will raise the rate by 1 percentage point, agrees an independent expert on the financial market Sergei Drozdov. However, in Russian realities, even this is not enough to curb inflation. It is necessary to strengthen the ruble, in which the Ministry of Finance is absolutely not interested: after all, it is important for it to “cure” the budget from the deficit. According to the analyst, the rate can be raised by at least 2 percentage points at once, but the prices in stores will not go down from this.