We believe that the Central Bank, as at previous meetings, may consider options for maintaining the 15% rate and reducing it by 100 bps to 14%.
Following the results of the last meeting, the Bank of Russia gave a soft signal: "The Bank of Russia will assess the expediency of further lowering the key rate at the next meetings, depending on the sustainability of the slowdown in inflation, the dynamics of inflation expectations, as well as the assessment of risks from external and internal conditions."
The inflation situation in the first quarter is developing along the lower boundary of the Central Bank's baseline forecast, while the economic situation in the first quarter is significantly lower than the Central Bank's forecast.
The Bank of Russia predicted that annual inflation in the first quarter would be 5.8-6.8%. Rosstat reported that inflation in March was 5.9%, i.e. at the lower limit of the Central Bank's forecast.
The Bank of Russia predicted that GDP growth in the first quarter would be 1.1-2.1%. At the same time, the Ministry of Economy estimated a 1.5% drop in GDP in February after a 2.1% decline in January, while in January-February GDP decreased by 1.8%. The PMI business activity indices for March indicated a reduction in business activity in both industry and the services sector.
Therefore, we expect that the Central Bank will continue to carefully reduce the key rate in a standard step of 50 bp.
The Central Bank's greater caution is supported by finding stable inflation above the 4% target, still elevated inflation expectations, uncertainty about upcoming budget changes, and the conflict in the Middle East (increased energy and logistics costs for the global economy).
Conflict in the Middle East remains an important inflationary risk. We believe that this factor, as at the last March meeting, will deter the Central Bank from a broader rate cut (100 bp).
Forecast for the next meetings
We expect the Bank of Russia to maintain a soft signal, as it did at the March meeting: "The Bank of Russia will assess the feasibility of further lowering the key rate at the next meetings, depending on the sustainability of the slowdown in inflation, the dynamics of inflation expectations, as well as the assessment of risks from external and internal conditions."
We expect that at the next meeting on June 19, the Bank of Russia will again reduce the key rate by 50 bps, to 14%.
By the end of the year, we forecast a reduction in the key rate to 12.5%. By the end of the second quarter, we forecast a key rate of 14%, by the end of the third quarter – 13%, by the end of the fourth quarter – 12.5%.
We expect the average key rate to be 14.1% this year, after 19.2% last year.
Impact on the economy
A significant part of corporate loans are issued at a floating rate. Therefore, the likely reduction of the key interest rate by 50 bp will lead to the fact that businesses will spend less on debt servicing.
In general, monetary policy will remain tight, i.e. it will continue to cool consumer and investment demand, as well as stimulate the propensity of citizens and businesses to save rather than spend.
We expect the economy to grow by 0.5% this year after growing by 1% last year. We also believe that full employment will remain in the economy, meaning there is no need to talk about a recession.
Economic growth, as it was last year, will remain very uneven.
Impact on deposit rates
We expect deposit rates to decrease by about 50 bps in the coming weeks after the Central Bank's decision.
According to the Central Bank, the average maximum deposit rate in the Top 10 banks in the first decade of April decreased to 13.43% (minimum since October 2023). We believe that it is still profitable to open a deposit now, because it is possible to fix the real (minus inflation) profitability.
Two weeks after the meeting, we expect to see the average maximum deposit rate below 13%.
We expect that deposit rates will gradually decrease following the key rate and may drop to 11-12% by the end of the year.
In general, we believe that depositors should adhere to the strategy of fixing current high rates for as long as possible.
Impact on credit rates
We believe that consumer loan and mortgage rates will continue to decline slowly after the Central Bank's decision (within 50 bps). At the same time, they may adjust more slowly than deposit yields.
Currently, there are quite significant macroprudential measures in place that limit banks' ability to issue consumer loans, especially to populations with high debt loads.
This year, we expect a slow decline in loan rates following a reduction in key interest rates and deposit rates.
In general, high loan rates can persist for a long time, so borrowers should carefully plan their financial options.
Impact on the ruble exchange rate
We believe that the Central Bank's rate cut will not have a significant impact on the ruble exchange rate at the moment, as it is already largely embedded in market expectations.
As before, tight monetary policy will continue to support the ruble, although this support is gradually decreasing with each reduction in the key rate.
A high key rate contributes to the attractiveness of savings in rubles.It cools consumer and investment demand and import demand (i.e. demand for currency).
Makes it expensive to speculate against the ruble.
With the current high ruble rate, it is more profitable for exporters to sell foreign currency earnings rather than borrow in rubles to finance current ruble expenses.
We expect the ruble to remain strong in the coming weeks and continue trading in the established ranges of 73-78 per dollar, 10.7-11.4 per yuan, 86-92 per euro.
The ruble is supported by sales of yuan from reserves within budget operations amounting to 4.6 billion rubles per day, the key interest rate is still high, and expectations of an increase in export foreign exchange earnings due to the rise in oil prices due to the war in the Middle East.
We estimate a lag of about a month and a half between current oil prices and the impact on the ruble exchange rate (the flow of foreign exchange earnings to the domestic market).
In March, the price of Russian export oil rose to $77 per barrel after $45 in February and $41 in January, and in April the price remained above $105 per barrel. We expect increased foreign exchange earnings to flow into the foreign exchange market in the coming weeks.
Impact on investors
The reduction in the key interest rate is a positive factor for the bond market.
At the moment, we do not expect the Central Bank's decision to have a significant impact on the bond market, as a 50bp reduction in the key rate has already been included in bond prices.
We believe that bond prices will continue to rise modestly in the coming months following a slowdown in inflation and a gradual reduction in the key interest rate.
From an investor's point of view, we believe that it is worthwhile to keep a diversified portfolio that will be resistant to various developments in the situation in geopolitics and domestic monetary policy.
We consider it reasonable to keep in the portfolio a set of reliable corporate bonds with permanent and variable coupons (fixes and floaters), as well as long-term OFZs. Credit risks are increasing, so investors should choose more reliable issuers.
Mikhail Vasiliev, Chief Analyst at Sovcombank.
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