The next meeting of the Board of Directors of the Bank of Russia with the decision on the key interest rate plunged into chaos the minds of economists.
Polls by Bloomberg and Reuters showed a record spread of forecasts this year. While all experts are confident that the Central Bank will continue to tighten policy, the scale remains a matter of controversy.
Half of the respondents expect a sharp step up by 1 percentage point, while the rest admit an increase of 0.5 and 0.75 percentage points.
Money market traders surveyed by ACI Russia have a more definite view of the situation: two-thirds of them expect an increase from 5.5% to 6.5% – the strongest since December 2014.
“The Central Bank has no choice but to demonstrate its rigidity. The elections are ahead, and it is necessary to show that there is a desperate struggle against inflation and, in order to overcome it, the Central Bank is ready to do anything, “says Evgeny Kogan, president of the Moscow Partners IG.
Since the beginning of 2020, the growth rate of consumer prices has tripled (from 2.5% to 6.5%), and food inflation has quadrupled (8.7%).
Over the year, chicken prices increased by 19%, fish – by 9%, sunflower oil and eggs – by 27%, sugar – by 44%. In January-June, buckwheat became more expensive by 10%, potatoes – by 69%, cabbage – by 93%, and the rise in prices for carrots reached 142% and entered the orbit of the President’s “Direct Line”.
Since the beginning of the year, the Central Bank has raised the key rate that regulates the cost of loans in the economy and the profitability of investments in rubles by 1.25 percentage points.
“A further 1% increase in the key rate, expected on Friday, could end the cycle of monetary tightening,” analysts at Commerzbank write.
Many in the market are beginning to believe in such a scenario, says Dmitry Polevoy, Investment Director of Loko-Invest: this is evidenced by the inflow of capital into the Russian public debt market, which, after a protracted fall, “broke off the brakes” and shows a rally that has not been seen on the stock exchange since April.
The RGBI index, which tracks OFZ prices, added 0.13% on Tuesday, 0.33% on Wednesday and another 0.36% on Thursday, and has jumped 0.74% since the beginning of the week.
The demand for OFZ comes from non-residents, they also increase investments in the ruble in the money market as part of carry-trade operations, analysts from Sberbank CIB write.
“With an increase in the step of raising the rate, the Central Bank may make the signal of further tightening of the interest rate policy less clear, or even remove it altogether,” says Veles Capital analyst Yuri Kravchenko.
There are formal grounds for this: in the week of July 13-19, Rosstat recorded the first deflation this year (by symbolic 0.01%), and the annual rate of price growth slowed down from 6.56% to 6.5%.
The intrigue is whether the Central Bank is ahead of the situation or running after it, notes Ivolga Capital CEO Alexei Khokhrin: “Will the increase or the seemingly final series of increases now really become a recipe for inflation, or the collapse of the markets will force the regulator to tighten the screws further, and not quite consistently anymore? “
“Raise the Central Bank of the Russian Federation or not raise the rate – this will have little effect on the inflation imported to us,” Kogan points out. In the first quarter, the cost of imported goods increased by 15%, and in the fall, clothing and equipment retailers will increase prices by another 10-15% due to a sharp rise in the cost of container transportation.
The Central Bank of the Russian Federation has little to oppose global inflationary pressure, but a further increase in interest rates will at least allow the ruble to remain strong enough, analysts from Sberbank CIB write. According to their forecast, by the end of the year, the dollar rate will approach 70 rubles.