The Bank of Russia, as expected, kept the key rate at 16% per annum, left a neutral signal and somewhat tightened its rhetoric.
Inflation has continued to slow down in recent months, but more slowly than the Central Bank predicted. The demand in the economy remains high, despite the key rate of 16%. The Bank of Russia has raised its forecast for GDP growth for this year to 2.5-3.5% from 1-2%.
There are still risks that inflation may remain elevated for a long time. Among them are a shortage of personnel in the labor market and rapid wage growth, uncertainty with geopolitics and the ruble exchange rate, increased inflation expectations, an upward deviation of the economy from the trajectory of balanced growth, and the risks of expanding the budget deficit.
By maintaining tight monetary conditions, the Bank of Russia seeks to cool the still high lending and reduce excess demand in the economy in order to slow the growth of consumer prices and return inflation to the target level.
The Bank of Russia raised its inflation forecast for the end of this year to 4.3-4.8% from 4.0-4.5% earlier. We expect annual inflation to peak this July at 8.2% (after utility tariffs increased by almost 10%) and slow to 6% by the end of this year.
Forecast for the next meetings
The Bank of Russia pointed out that in order for inflation to return to the target, a longer period of maintaining tight monetary conditions in the economy will be required than previously predicted.
In addition, the Central Bank raised the forecast for the average key rate for this year to 15-16% from 13.5-15.5%. This is consistent with our expectations for an average key rate of 16% this year.
From the regulator's point of view, it is now important to maintain tough rhetoric so that there is no premature softening of financial conditions. This will make it possible to better convey to the economy today's increase in the key rate in order to slow down inflation.
We expect that at the next meeting on June 7, the Bank of Russia will again keep the key rate at the current level of 16%.
In the baseline scenario, we believe that the Central Bank will not lower the key rate this year. We estimate the probability of our baseline scenario at 70%.
In a risky scenario (probability of 30%), we assume that the Bank of Russia may raise the key rate by 100 bps this year, to 17%, if inflation continues to grow at an increased pace.
Borrowers should be prepared for the fact that money in the economy will remain expensive for a long time, and possibly even more expensive.
Impact on the ruble
We believe that today's decision of the Central Bank coincided with market expectations and therefore at the moment it will not have a significant impact on the ruble exchange rate.
In general, maintaining the key rate at a high level of 16% in the coming months will continue to support the ruble, along with the mandatory sale of foreign exchange earnings for the largest exporters.
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 expect the ruble to remain stable in the coming weeks and will trade in the established range of 90-95 per dollar, 97-102 per euro and 12.4-13.1 per yuan.
Impact on rates in the economy
We believe that today's decision of the Central Bank 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 general, savers and borrowers should be prepared for the fact that this period of tight monetary policy may turn out to be long, and the key rate will remain double-digit throughout 2024 and most of 2025.
Impact on the debt market
We believe that the prices of permanent coupon bonds will continue to fall in the coming weeks. 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
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