Sovcombank's forecast for the meeting of the Bank of Russia on the key rate on April 26

In the baseline scenario, we expect the Bank of Russia to keep the key rate at the current level of 16% at the next meeting on April 26.

We believe that the Central Bank will tighten its rhetoric and may signal its readiness to raise the key rate at the next meetings if inflation continues to grow at an increased pace. We believe that the Bank of Russia will not lower the key rate this year.

We estimate the probability of our baseline scenario at 70%.

Borrowers should be prepared for the fact that money in the economy will remain expensive for a long time, and possibly even more expensive.

In a risky scenario (probability of 30%), we assume that the Bank of Russia may raise the key rate by 100 bps, to 17% at the next meetings (April 26, June 7 or July 26).

Inflation has continued to slow down in recent months, but more slowly than the Central Bank needs to return inflation to the target 4% by the end of this year. Therefore, the Bank of Russia may prefer to add monetary policy rigidity now in order to try to bring inflation back to target by the end of this year.

Recall that the Bank of Russia wants to return inflation to the target level by the end of this year, the Central Bank's forecast for inflation is 4.0-4.5%.

At the same time, the consensus of analysts from the Central Bank macro survey assumes inflation at the end of the year at 5.2%, and we forecast inflation at 6%.

If the market and we turn out to be right, the Bank of Russia will soon see that inflation for the year is above the forecast 4-4.5%.

And then the Central Bank will have a choice – either to shift the achievement of the inflation target to 2025 (this is the basic scenario for us and the market), or to raise the key rate further in order to try to return inflation to the target this year (a risky scenario).

Recall that the Bank of Russia, in the summary of the March key rate discussion, provided a list of criteria necessary to reduce or increase the key rate.

The first point for lowering the key rate is a further steady slowdown in current inflation.

Seasonally adjusted inflation in March, according to the Central Bank, amounted to 4.5%, that is, it fell almost to the target level after 6.3% in February and January. However, the slowdown in inflation in March was mainly caused by volatile components such as food, and therefore cannot be considered a sustained slowdown.

Seasonally adjusted core inflation, which characterizes the most stable part of inflation, fell to 6.1% in March from 6.8% in February and 6.7% in January. That is, the stable part of inflation remains above 6%, despite the high key rate.

In early April, Rosstat again recorded an acceleration in inflation. In the first half of April, consumer prices increased by 0.29%. This is above the seasonal norm and corresponds to about 6.5% of seasonally adjusted annual inflation.

If inflation continues to grow at such a pace in the coming weeks, the Bank of Russia may consider raising the key rate by 100 bps to 17% at the next meetings.

Recall that the list of criteria for raising the key rate, which the Bank of Russia announced in the summary of the March meeting on the rate, consists of four points and two points have already been fulfilled - this is the absence of signs of a decrease in consumer activity and an increase in the rigidity of the labor market.

Thus, unemployment in February updated the historical minimum, falling to 2.8% from 2.9% in January. In turn, consumer demand in February, and according to operational data in March, continues to be high. Lending in March, according to the Central Bank, increased in all segments, despite the high key rate.

We expect consumer price growth to continue to slow down in the coming months due to the stable ruble exchange rate and tight monetary conditions.

At the same time, the slowdown in the current rate of inflation will be slow due to a number of pro-inflationary factors.

The pro-inflationary factors are a shortage of personnel in the labor market and rapid wage growth, a soft budget policy, geopolitical risks and risks of a weakening ruble, increased inflationary expectations of the population and businesses, and still active lending, including under a large number of preferential programs.

We believe that annual inflation will continue to rise in the coming months and will peak at 8.3% in July after housing and communal services tariffs were indexed by almost 10%. By the end of the year, we expect annual inflation to slow down to 6%.

We expect inflation to return to the 4% target in 2025.

Forecast for the next meetings

We believe that the Bank of Russia will tighten its rhetoric this Friday and may signal its readiness to raise the key rate at the next meetings if inflation continues to grow at an increased pace.

In the basic scenario (70% probability) We expect the key rate to remain at the current level of 16% for the entire year.

In a risky scenario (probability of 30%), we assume that the Bank of Russia may raise the key rate by 100 bps, to 17% at the next meetings.

Impact on the ruble

We believe that the results of the meeting of the Bank of Russia this Friday will be tougher than the market expects, and therefore may provide moderate support to the ruble.

In general, the long-term maintenance of ruble interest rates at a high level, along with the likely extension of the mandatory sale of foreign currency earnings, will keep the ruble stable.

Tight monetary policy slows down lending and reduces import demand (and currency demand). In addition, the current high interest rates on ruble deposits of 14-16% per annum support the attractiveness of savings in rubles.

We believe that the ruble will continue to trade in the range of 91-95 per dollar, 97-101 per euro, 12.5-13.1 per yuan in the coming weeks.

Impact on rates in the economy

We believe that maintaining the key rate of 16% with a tight signal will not have a significant impact on banking products. We expect deposit and loan rates to remain at current high levels in the coming months.

In a risky scenario, with an increase in the key rate to 17%, deposit and loan rates may increase by a comparable amount in the coming months.

In general, savers and borrowers should be prepared for the fact that this period of tight monetary policy may be prolonged, and the key rate may remain in double digits for the whole of 2024, and possibly most of 2025.

Impact on the debt market

We believe that the prices of permanent coupon bonds may continue to fall in the coming weeks, including after the meeting of the Bank of Russia. The reason for this is likely to be a further shift in market expectations for monetary policy easing at a later date.

In conditions of increased uncertainty with inflation and the key rate, we still consider the most attractive idea for investors to buy floating-rate bonds – more liquid government OFZ-PCs with a current coupon of ~15.5-16% (for example, OFZ-PK 29014) and more profitable corporate floaters (with coupons of 17-18.5%).

Mikhail Vasiliev, Chief Analyst at Sovcombank