The board of directors of Russia’s Central Bank has decided to cut its key interest rate by half a percentage point to 10%, citing an inflation slowdown and inflation expectations at the remaining unsustainable economic activity, the regulator’s press release said.
The Central Bank has decided to lower the key rate, taking into account slowdown of inflation. For a trend towards a sustainable decline in inflation to strengthen, the central bank said the key rate needed to be maintained until the end of the year at 10% with further possible cuts in the first and second quarters of next year.
The bank has warned that moderately-tough monetary conditions would remain in the Russian economy for quite a long time.
"This is due to the need to maintain positive real interest rates at a level that will ensure the demand for lending that does not lead to an increase in inflationary pressure, as well preserve the incentives to make savings," the regulator said.
The Central Bank’s press release also noted that the risks of inflation not reaching the target level of 4% in 2017 remain due to the inertia of inflation expectations and a possible weakening of incentives of households for savings.
The next meeting of the Board of Directors of the Russian Central Bank in 2016 is scheduled for October 28.
Advisor to the CEO of the 'Opening-Broker' brokerage house on macroeconomics, economist Sergey Hestanov, speaking to Vestnik Kavkaza, said that the decline in the key rate, which has been anticipated by market players, is unlikely to have a noticeable impact on the Russian economy.
"The key rate is usually very important when the economy is growing. And on the contrary, the influence of this factor goes down when the economy is in recession, and most of the economic entities prefer to extinguish loans, not to attract them," he explained.
According to the expert, the soonest next rate cut that can be expected not earlier than in the first or second quarter of the next year. "Today's decision of the Central Bank is due to the strong decline in inflation over the past few weeks. But in general, each reduction of the rate is very hard on the Central Bank, therefore, it is quite premature to speak about a trend," the economist warned.
"Now, although inflation is being reduced, it is still higher than the target level of 4%. In addition the Central Bank fears that a strong decline in the key rate will lead to a drop in the ruble exchange rate," he pointed out.
Speaking about a possible decline in the ruble exchange rate after the elections to the State Duma, the expert noted that an increase in the key rate (one of the ways the Bank of Russia can respond to the collapse of the national currency) is not the most effective mean.
"The Central Bank raised the key rate to support the ruble in 2014. Yes, to some extent, this may help the ruble, but it will put a lot of pressure on the financial system. Therefore, I think that if there is no force majeure, the increase in the rate is highly unlikely in the near future," Sergey Hestanov said.
An associate professor of Stock Markets and Financial Engineering of RANEPA, Vasiliy Yakimkin, in turn, said that the Central Bank could reduce the key rate more than to 10%, considering the current level of inflation, but it decided not to risk it.
"It could reduce it more radically, for example, to 8.5%, because the current inflation is about 5.8%, and the annual inflation will rise to around 6% in remaining months," the expert explained.
According to Yakimkin, a high level of uncertainty is a key reason, forcing the Central Bank to act prudently. "First of all, it is the uncertainty in oil prices, and secondly, the uncertainty in the policy of the leading world central banks, first of all, the US Federal Reserve, which will decide on September 21 to change or not to change its monetary policy. Then in the same two days there will be a meeting of the Bank of Japan, which is also very important for us," he said.
The economist reminded about macroeconomic issues as well. "First of all, it is a very low level of domestic demand. Such macroeconomic uncertainty does not allow to predict the rapid economic growth," the associate professor of Stock Markets and Financial Engineering of RANEPA noted.
In addition, it is necessary to consider the risk of the capital outflow in the case of a sharp decline in the key rate. "If the rate is lowered dramatically, it may cause the strongest outflow of western money from Russia, which will create turbulence in the currency market and cause a spike in inflation. And then emergency measures must be taken," Yakimkin said.
According to the expert, the parliamentary elections in Russia will not affect the ruble exchange rate, which should be more afraid of a drop of oil prices or the US Federal Reserve's decision. "But if oil declines or the Federal Reserve suddenly raise rates, the ruble will collapse as well, as there will be the outflow from emerging capital markets. But I do not expect that the Federal Reserve will change the rate," the economist assured.
"Such structures as the Central Bank must take all the risks into account. Therefore, I think that it will adhere to the policy of wait and see, but until the end of the year once again it will cut the rate by at least 0.5%," he predicted.
