Crash course: the Bank of Russia lowered the key rate to 6.5% per annum

Crash course: the Bank of Russia lowered the key rate to 6.5% Godovikova link
15:37

Vladimir Agoev
On 25 October, the Central Bank of Russia reduced the key rate by 0.5 percentage points to 6.5% per annum. This is the fourth consecutive decline. Its decision in Central Bank explained the slowing growth of consumer prices in the country. The regulator has changed its forecast for inflation for 2019 with 4-4,5% to 3.2–3.7%. According to the experts, the accelerated rate cuts by the Bank of Russia will lead to a more noticeable cheaper loans and may support the ruble in the long term.

  • The building of the Central Bank of the Russian Federation
  • globallookpress.com
  • © Anton Belitsky/Global Look Press

On Friday, October 25, the Board of Directors of the Bank of Russia has Sinisi key rate by 0.5 percentage points to 6.5% per annum. The value was the lowest since March 2014.

In 2019 the Russian regulator for the fourth time reduced rate.

According to the official report of the Central Bank, consumer price growth in Russia is slowing faster than expected. As a result, the regulator has lowered the forecast of inflation in 2019 with 4-4,5% to 3.2–3.7 per cent. As expected in the Central Bank, in 2020 the figure will be around 3.5–4%, and then to remain near the target level of 4%.

«The slowdown is happening faster than predicted. Inflation expectations continue to decline. The rate of growth of the Russian economy remains limited. Are the risks of a significant slowdown in the global economy. In the short run disinflationary risks outweigh proinflationary», — stated in the press release of the Central Bank.

As noted in the regulator, depending on further changes in the dynamics of inflation and economic development, the Bank of Russia will assess the feasibility of further reduction of the key rate on one of the next meetings.

Note that the last change in the key rate of the Central Bank occurred in September. The regulator reduced it from 7.25% to 7% per annum and also explained this decision by the slowdown of inflation in the country.

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The next meeting of the Board of Directors of the Central Bank is scheduled for December 13. As told in an interview with RT chief analyst «BCS Premier» Anton Pokatovich, during his first winter meetings, the top management of the regulator can again lower the rate to 6.25% per annum. According to analysts, in early 2020, the inflation rate in Russia can fall to the level of 2.2–2.5% and the Central Bank will continue lowering the rates.

Senior analyst QBF Oleg Bogdanov considers a possible rate cut in December to 6% per annum. As explained by the expert in conversation with RT, if in subsequent months, inflation will remain below the current level of 3.8%, by the end of 2020, the key rate may drop to 5% per annum.

In this case the regulator has traditionally tries to take into account all uncertainties, so will try to tread carefully. In an interview with RT told the Director of financial markets and macroeconomics IR «Instant invest» Alexander Timofeev.

«It is likely that the regulator will cut rates in December and will not change it in the first half of 2020. This pause is necessary for the Central Bank to assess the overall situation in the economy. If so, then after about a year the rate will be near the lows of 2013,» — said Timofeev.

Housing

As explained by analysts, the decline in rates is necessary to stimulate business activity and economic growth in General. So, in the long term, the actions of monetary authorities lead to cheaper loans, increase domestic demand and investment.

In particular, experts expect a more active reduction in mortgage rates on the background of the policy of the regulator. According to the latest data of the Central Bank, at the end of August, the average mortgage rates in Russia decreased to 9.9% per annum. As suggested by Anton Pokatovich, in 2020, the figure could fall below 9%.

«We believe that by the end of 2019 mortgage rates will continue to gravitate to levels of 9.3–9.6% per annum. In the perspective of 2020 we see potential for lower mortgage rates in the range of 8.5–9% per annum,» — said the expert.

Recall that in late February, President Vladimir Putin officially instructed the government and Central Bank to take measures to reduce mortgage rates to at least 8%. In the Central Bank consider it possible to complete the task by 2024. Recently stated by Elvira Nabiullina.

About the same scenario laid out in the national project «Housing and the urban environment». The program assumes that the interest on housing loan will decrease to 8.9% in 2019, and then to 8.5% in 2021-m and 7.9% in 2024-m.

Exchange peace of mind

RT interviewed the experts highly estimated the probability of a rate cut, the Central Bank immediately to 6.5% per annum. According to Alexander Timofeeva, the Bank of Russia is committed to transparency in its decisions and prepares in advance of the markets to changes in monetary policy. So, in mid-October, Nabiullina said about the possibility of a more drastic rate cut.

As a result, investors in their actions in advance to take into account the decision of the Bank of Russia, so the decline in the short term will have a limited impact on the ruble, said Timofeev. At the time of announcement of the meeting of the Board of Directors of the Central Bank of the Russian currency is slightly strengthened in the course of trading on the Moscow exchange. So, the dollar declined by 0.15% to 63.9 ruble and the Euro by 0.01% to 71 rubles.

The official exchange rates of the Central Bank on 26 October was 63,99 rubles per dollar and 71,12 ruble per Euro.

As noted by Oleg Bogdanov, in the long run prolonged decline in the Central Bank rate will have a positive impact on the Russian currency. While the key rate is still relatively high, investors are trying to actively purchase the Russian debt securities at more attractive yields. The actions of the players in the market lead to higher prices of government securities and support the ruble.

According to the Moscow exchange to date, the government bonds index (RGBI) has reached the highest level in the history of observations and is trading near the mark of 149 points.

«While a rate cut is not finished, we have a price increase on the market of government securities. The yield of Federal loan bonds (OFZ) with maturities of one year had fallen below 6%. The market is ahead of the curve and government bonds steadily becoming more expensive. It’s starting to attract investors, which is playing in supporting the ruble,» — said Bogdanov.

As told in an interview with RT, the chief of analytical Department IK «Veles the Capital» Ivan Manaenko, at the moment investors do not expect sharp fluctuations in the currency market. According to him, the end of the year the pressure on the ruble will begin to provide seasonal factors, but the dollar will remain close to 64 rubles, and the Euro — in the region of 72 rubles.

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