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Uncertainty in the market: Experts do not have an unanimous forecast for the key rate – Cbonds release

December 14, 2018 | Cbonds

Today, the eighth meeting of the Bank of Russia will be held on monetary policy this year, which will decide on the amount of the key rate. In September, the Bank of Russia increased its key rate by 25 basis points – up to 7.5% per annum; according to the results of the October meeting, the rate did not change.

In addition to the traditional survey of analysts, Cbonds voted in a mobile application – 58% of those who voted expect a rate increase by 25 basis points, 37% do not expect a change, and only 5% of participants believe that the rate will be decreased.

Analysts also disagree and predict two possible scenarios for events – an increase in the indicator to 7.75% or its maintenance at the level of 7.5%. As the main reasons for the change in the key rate, economists note the likely resumption of foreign exchange intervention and the strengthening of inflation expectations. Among the arguments in favor of maintaining the current indicator is the level of inflation close to the target of the Central Bank and the stabilization of the financial markets.
“We do not see any indisputable arguments in favor of the rate increase for several reasons,” commented Dmitry Dolgin, Chief Economist for Russia and CIS, ING Wholesale Banking Russia, “Last month’s CPI coincided with the consensus and expectations of the Central Bank and amounted to 3.8% y/y. Inflation expectations of the population in November were at the level of 9.8%, which is below the September figure of 10.1%. The upcoming VAT increase is taken into account by the regulator. The situation in terms of risk EM is generally favorable, the ruble rate is stable, and the resumption of currency purchases from January at a rate of 3-5 billion USD per month does not threaten the ruble due to the expected strong current account, which will be at least 10 billion USD per month. At the same time, we acknowledge the fact that the likelihood of an increase in the key rate in December is non-zero, since due to accelerated weekly inflation in December, the annual CPI may overcome the upper limit of the target range of the Bank of Russia of 3.8%–4.2%.” 

Irina Lebedeva, Senior Analyst, URALSIB Bank, is expecting the rate increase: “I am expecting a 25 bps rate increase up to 7.75%. I believe that the Central Bank will resume the intervention, which will be one of the factors that will make the rate increase. The comment will remain moderately tough. It is possible that the regulator will describe an additional list of measures that can be used to sterilize excess liquidity and prevent a decrease in interest rates in the interbank market. At the same time, the chances will be kept that the regulator will be able to resume the cycle of monetary easing at the end of 2019.”

“I believe that the Central Bank of the Russian Federation will increase the key rate by 25 bps to 7.75% per annum, and at the same time announce the resumption of the sale of rubles in the open market under the budgetary rule from mid-January 2019,” Valery Weisberg, Director of Analytical Department, EC REGION, assesses the outcome of the meeting.  

“We do not expect a change in the rate. The regulator's comment will be more dedicated to the strategy of buying currency, discussing the issue of increasing VAT and the dynamics of inflation in 2019,” says Sergey Konygin, Macroeconomist, Gazprombank.  

Konstantin Bushuev, Head of Market Analysis, Otkritie Broker, also expects a key rate increase by 0.25%: “At the meeting on December 14, the regulator is likely to mark the growth rate of inflation in November higher than expected. At the same time, it cannot be excluded that in January-February 2019 inflation in annual terms may reach locally maximum levels of 5.7%–6.2% y/y, after which it will decrease to 3.5% y/y by January 2020. On the other hand, the Bank of Russia can note the reduced volatility in emerging markets and the possible recovery of purchases of the Central Bank's currency in the open market from the beginning of 2019. Most likely, in the context of continuing local inflation, the Bank of Russia will cosmetically increase the basic rate to 7.75%”.  

“We do not expect any changes in the key rate. This year, inflation will not exceed 4%. The situation in the foreign exchange market has stabilized,” says Anton Struchenevsky, Senior Analyst, Sberbank CIB

“In general, the likelihood of increasing the key rate at one of the next meetings of the Bank of Russia remains quite high due to the need for preventive containment of inflation risks, the peak of which will be in the first half of 2019. However, since the last increase in the key rate in September, the external situation and the dynamics of financial markets, including the ruble exchange rate, relatively stabilized, and the threat of new sanctions was postponed until next year. Inflation in annual terms since the last meeting in October continued to grow, but so far it has only reached the lower limit of the forecast value of the Central Bank at the end of 2018 and will probably remain within the range set by the regulator, – said Yuri Kravchenko, Senior Analyst, Veles Capital, – We believe that at the meeting on December 14, the Central Bank will retain the key rate at the level of 7.5% per annum. It is most likely that the Bank of Russia will preserve the most conservative rhetoric in a press release, which will not cancel the possibility of a rate increase in early 2019. If the indicator remains at the same level, a much more significant event for financial market participants will be the regulator's decision to resume purchases of currency within the framework of the budgetary rule execution next year. In this case, the Russian currency will be under pressure." 

“We are expecting a key rate increase by 25 basis points. The comment will be moderately tough. There is a number of prerequisites for this. Firstly, this is the continuing growth of inflation. Secondly, this is the expected resumption of interventions, in anticipation of which it is better to slightly cool down speculative moods. Thirdly, on EM in general, the trend is kept toward the growth of regulator rates, and it is not very likely that Russia should step out of it,” said Alexander Kudrin, an independent expert

"We believe that the Bank of Russia will leave the rate unchanged, and will also confirm its intention to resume operations to buy foreign currency since mid-January. By the end of the year, inflation may well meet the 4% target, and also surprise, rather, for the better in the first quarter of next year (approximately 5.5%). The dynamics of inflation expectations, as well as the current volatility in the financial market, do not cause concern. A potential rate increase would have a significant effect on inflation only after a long time, and in early 2020, consumer price growth rates would drop significantly below 4%,” says Oleg Kuzmin, Economist for Russia and CIS, Renaissance Capital

“We are expecting a key rate increase by 0.25%. An increase in inflation expectations significantly increased the likelihood of a key rate growth at a meeting of the Bank of Russia on December 14, despite the fact that inflation remained near the target level (3.9% y/y, according to Rosstat). In our opinion, the rate will be increased to 7.75% per annum, after which the Central Bank of the Russian Federation will take a break in the rate increase. In November 2018, inflationary expectations of the population for the next 12 months increased by 0.5%, to 9.8%, according to a comment of the Bank of Russia on inflation. The main reason for the increase in expectations in November is the dynamics of prices for gasoline and some food products, but growth is accelerating for a very wide range of goods. Many people expect price increases before the New Year holidays, including under the influence of VAT increases. On Friday, the Bank of Russia is likely to announce its decision on regular purchases of foreign currency under the budgetary rule. If the market situation does not change, the regulator will return to the market with purchases for the Ministry of Finance after the New Year holidays – January 15, 2019, the Head of the Central Bank of the Russian Federation Elvira Nabiullina noted previously. It is expected that a decision on the implementation of purchases of currency postponed until the end of 2018 (approximately 28 billion USD, according to our estimates) will be made later next year. In our opinion, the resumption of purchases of foreign currency for the Ministry of Finance will have a significant pressure on the ruble exchange rate against major currencies and inflationary expectations. Therefore, we believe that plans for the resumption of purchases will be accompanied by an increase in the key rate of the Bank of Russia,” comments Elena Vasilyeva-Korzyuk, Head of Research, AK BARS Finance 

“Increasing the rate by 0.5% at one meeting will help mitigate the risks of increasing VAT,” said Mikhail Krylov, Director of Analytical Department, Golden Hills-Kapital AM, “Expectations for repaying foreign debt are doubly covered by income based on the balance of payments. Nevertheless, the current inflation forecast for the year was in the range of 3.8%-4.2%, whereas in fact, since the beginning of the year, the CPI increase was 3.4% for 11 months. Estimation of inflation expectations grew only by 0.5% – up to 9.8%. Imputed inflation in long-term OFZ-IN remains at approximately 5% per annum. Expectations for the growth of prices for the year ahead may be caused by the perception of the preceding price increase. Thus, in comparison with April and May, the number of those who said about the actual acceleration of price increases when polled by the Central Bank in November almost doubled. During the period after the previous rate increase, the ruble stopped falling. While inflationary expectations are not anchored, but changes in the consumer basket are already cementing the interim result of disinflation, it is quite possible to get by increasing the rate only by 25 bps.”


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