We expect that at the next meeting on February 14, the Bank of Russia will again keep the key rate at 21% and abandon harsh rhetoric.
Following the results of the December meeting, the Bank of Russia signaled that "it will assess the expediency of raising the key rate at the next meeting, taking into account further dynamics of lending and inflation."
According to the Central Bank, corporate lending decreased by 0.2% in December, while retail lending decreased by 0.5%. According to the Central Bank's operational data, retail and corporate lending also declined in January, partly due to seasonal factors.
Given the slowdown in lending, we believe that the Central Bank will not raise the key rate.
At the same time, inflation and inflation expectations remain at elevated levels, so the Central Bank is likely to maintain tough rhetoric and point to the need to maintain tight monetary conditions for a long time.
We believe that seasonally adjusted inflation in January was about 13% after 14% in December and November, meaning there is no significant slowdown in inflation.
In addition, the population's inflation expectations rose to 14.0% in January from 13.9% in December and updated the annual maximum. In turn, business price expectations did not change in January, remaining near the maximum since April 2022.
On average, companies surveyed by the Central Bank include 10.7% inflation in their business plans for this year, which is even higher than last year (9.5%). We forecast an inflation rate of 8.1% for this year. The consensus of analysts expects inflation to be around 7%.
In other words, there has been no progress in reducing inflation and inflation expectations so far. Therefore, we see no reason for a significant softening of the Central Bank's rhetoric.
Forecast for the next meetings
We believe that the Bank of Russia may tone down its rhetoric a bit and indicate that the likelihood of an additional rate hike has decreased. At the same time, the Central Bank is likely to point out the need to maintain tight monetary conditions for a long time in order to return inflation to the target 4%.
In the baseline scenario, we believe that the current level of the key rate of 21% will be the maximum in this increase cycle.
We believe that lending will continue to slow down in the coming months and will be in line with the Central Bank's forecast for this year. We believe that the slowdown in lending is sustainable. Therefore, in February, the Bank of Russia is likely to consider that the required rigidity of monetary conditions has been achieved.
In the baseline scenario, we expect that inflation will slow down and therefore the Bank of Russia will keep the key rate at the current level of 21% for the entire year.
On the one hand, lending will remain weak, i.e. the Central Bank may no longer raise the rate. On the other hand, inflation will remain significantly above the Central Bank's target level, so the Central Bank will not lower the rate.
Reducing the key interest rate requires a steady slowdown in inflation, a cooling of lending, a reduction in the rigidity of the labor market, and the absence of implementation of pro-inflationary risks from the budget or external conditions (oil prices, sanctions).
We believe that the conditions for lowering the key rate will develop in the first half of 2026.
Inflation forecast
Keeping the key rate unchanged at a high level of 21% and generally maintaining tight monetary conditions will continue to have a chilling effect on consumer and investment demand, followed by inflation.
We believe that inflation will remain at a high level in the coming quarters (about 10-11%), will reach 10% by the middle of the year and will slow down to only 8.1% by the end of the year.
The main factors in favor of slowing inflation this year are tight monetary policy and balanced fiscal policy.
We believe that credit growth this year will not exceed 10% and will be in line with the Central Bank's forecast for this year. The Central Bank is confident that "if there is no excessive stimulation of demand from credit and the budget, then inflation expectations, like inflation, will inevitably decrease."
At the same time, the extremely scarce labor market, increased inflationary expectations of the population and businesses, a weaker ruble exchange rate, sanctions costs, and higher-than-inflation indexation of tariffs and fees are still constraining factors for slowing inflation.
We believe that the labor market will remain tight until the end of the year and unemployment will not exceed 3%. The shortage of personnel will weaken slightly, but it will remain a factor of increased inflationary pressure.
The expected moderate weakening of the ruble will also be an important factor in increased inflation. In our forecasts for this year, we put the average ruble exchange rate at 14.6 per yuan, 108 per dollar and 112 per euro, after the average last year of 12.8 per yuan, 93 per dollar and 100 per euro.
The impact of the Central Bank's decision on economic rates
We believe that deposit rates will continue to decline slowly over the coming quarters after the Central Bank's decision.
In the baseline scenario, we believe that deposit rates are now at their maximum levels in this cycle. In general, we believe that it is profitable to open a deposit now. With an official inflation rate of about 10%, deposit rates are now 20-23% or higher.
We believe that inflation will gradually decrease to 8.1% by the end of this year, meaning that it is possible to fix real positive rates for a long time.
We believe that after the Central Bank's decision, interest rates on loans, including mortgages and consumer loans, will slowly decrease over the coming quarters, following deposit rates.
In general, savers and borrowers should be prepared for the fact that this period of tight monetary policy may be long and last for several years. Therefore, borrowers should carefully plan their financial options.
Impact on the ruble exchange rate
We believe that the Central Bank's rate decision will not have a significant impact on the ruble exchange rate at the moment.
At the same time, we expect that the current high key rate will continue to support the ruble.
On the one hand, the high key rate contributes to the attractiveness of ruble savings (deposits at 20+% per annum).
On the other hand, a high key interest rate cools consumer and investment demand and import demand (i.e., demand for foreign currency).
We believe that the ruble will remain stable in February and will trade close to current values. The expected trading ranges are 13.0-14.0 per yuan, 96-103 per dollar and 100-107 per euro.
According to statistics from previous years, February is the most favorable month of the year for the ruble due to seasonally low demand for the currency. At the beginning of the year, there was a seasonally low demand for foreign currency for the purchase of imports, for foreign tourist trips, and for payments on foreign debt.
Impact on the stock market and investors
We believe that the Bank of Russia may moderate its rhetoric somewhat and this may have a positive impact on the stock and bond markets.
From an investor's point of view, we consider it reasonable to keep a diversified portfolio for this year, which will be resistant to various developments in geopolitics and domestic monetary policy.
Liquidity funds and deposits are suitable for conservative investors.
It is wise to keep part of the portfolio in reliable corporate floaters, and part of the portfolio in corporate bonds with a fixed coupon.
Liquidity funds and floaters will help protect the portfolio from a possible deterioration in the geopolitical situation, the persistence of double-digit inflation and an additional increase in the key interest rate (a pessimistic scenario).
In case of a possible weakening of the ruble, it is wise to keep foreign currency assets in the portfolio, including replacement bonds and gold.
We believe that the key rate will remain high for a long time. Therefore, investors should choose more reliable and less over-leveraged companies that can withstand a long period of high rates.
Long-term OFZs and stocks are suitable for long-term investors, who can benefit from a possible warming of relations between Russia and the United States under Trump, a faster slowdown in inflation and a reduction in the key interest rate (an optimistic scenario).
Mikhail Vasiliev, Chief Analyst at Sovcombank
The "Comments" section of the AK&M news agency publishes materials submitted by Russian and foreign investment companies and banks. Their opinions may not coincide with the opinion of the editorial staff of the AK&M agency. The opinions presented in the comments are expressed taking into account the situation at the time of publication of the material. The comments are for informational purposes only; they do not constitute an offer or advice on the purchase or sale of securities. For questions about the placement of information in this section, please contact the agency's editorial office by phone (499) 132-61-30 ext. 0102.
