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The possibility of raising the key rate is not excluded – Cbonds consensus forecast

September 14, 2018 | Cbonds

Today, on September 14th, the sixth meeting of the Bank of Russia will be held concerning monetary policy this year, at which a decision will be made on the size of the key rate. Since March 23rd, after a decrease of 25 basis points, the key rate is at the level of 7.25% per annum.
Within the framework of the Global Forum of the Alliance for Financial Accessibility, the head of the Central Bank Elvira Nabiullina noted: "Now there are a few factors that would speak for a rate cut. There is a significant number of factors that indicate the rate retention. There were some factors that make it possible to raise the question of a possible increase in the rate. "
Most of the analysts interviewed by Cbonds believe that the value of the rate will remain at the current level. However, experts note the possibility of the regulator reviewing the current key rate indicator.
"According to our forecast, at the next meeting of the Board of Directors, the Bank of Russia may decide to raise the rate by 0.25 percentage points. The head of the Central Bank sent out a signal by noting the fact that there were some factors on the market that could prompt the board of directors to make a decision to raise the key rate, as noted by Anton Pavlov, Managing Director of Absolut Bank's retail products, – it is possible to mention several reasons for the upward correction. The main reason is the fall in the national currency rate to two-year lows in the setting of the worsening geopolitical situation. The market reacted very sharply not only to the already introduced sanctions package, but also to a new package that the US and the EU may introduce. In addition, the monetary policy of the US Federal Reserve continues to put pressure on the markets of developing countries, which has taken a course to raise the discount rate. This leads to an outflow of capital and forced growth in yield, including OFZ and stock market instruments. However, it must be understood that even if the Board of Directors decides to raise the key rate, it is most likely that this will be a temporary measure necessary to stabilize the market situation. The regulator will return to the course on mitigating monetary policy once the key indicators are stable at the level of the benchmarks. " 

Vladimir Osakovsky, Chief economist of Russia and CIS department of Merrill Lynch: "We think that market volatility is more important to the CBR when considering a rate hike than the actual level of RUB. Therefore, the likelihood of a protective rate hike increases with strong market moves, which could force the CBR to deliver a pre-emptive 100-150bp or more rate hike to stabilize the market. Gradual policy tightening in case of steady RUB depreciation is less likely. We think that the CBR will try to look through the short-term inflationary impact of FX devaluation with an unchanged policy rate, as it did in late 2015/early 2016. Weaker than expected inflation in 2Q18 seems to show that inflationary pass-through from RUB moves has dropped from its historical 10-15%. Therefore, the inflationary impact of 2018 devaluation could remain fairly limited and could actually reverse in case of RUB recovery. Thus, we think that the start of a tightening cycle will require clear acceleration of inflation beyond projected levels and the escalation of existing inflationary risks, CPI expectations in particular."

"Because of the volatility of the ruble, the rate will remain at 7.25%," says Mikhail Krylov, Director of the Analytical Department at Golden Hills-Kapital AM

"We do not expect changes in the rate in September," confirms Ilya Ilyin, an analyst at Promsvyazbank. 

Irina Lebedeva, Senior Analyst at Uralsib Bank, also does not expect a change in the key rate: "We do not expect a revision of the rate at the current meeting. From the point of view of accelerating inflation, tightening monetary policy is not yet required, but for a reversal, or at least a stoppage of capital outflow, an increase in the rate by 25-50 basic points is clearly not enough. Therefore, we believe that the Central Bank will limit itself to stricter rhetoric. 

A possible change in the rate is predicted by Valery Weisberg, Director of the Analytical Department of the Investment Company REGION: "The regulator has to solve a difficult task by balancing the size of the actual rate increase and the tone of the final release. Based on the assessment of the situation, which was voiced by representatives of the Bank of Russia last week, I expect the rate to increase by 25 basic points. However, such an increase may not be enough to calm the markets down. " 

"I am not expecting a change in the key rate on September 14th, but we will need to look carefully at the change in the CBR's rhetoric," says Natalia Orlova, Alfa-Bank's Chief Economist, as inflation accelerates to 3.1% y/y in August in a predictable trajectory, it cannot be ruled out that there will not be a noticeable tightening of the Central Bank's rhetoric. In the previous release, the Central Bank targeted the market for further smoothing out of monetary policy in 2019; it will be important to check if the Central Bank leaves this time this benchmark in its commentary. " 

"Despite increased volatility in emerging markets and stronger inflation in Russia in August (3.1% y/y against expectations of 2.9% y/y), at the meeting on September 14th, the Bank of Russia does not have any special reason to change the level of the key rate, - notes Konstantin Bushuev, head of the Market Analysis Department, Otkrytiye Broker – the current volatile situation does not provide the opportunity to lower the key rate further. The rate increase also does not make sense, because if the Central Bank refuses to buy currency on the open market, the Russian balance of payments becomes very strong, as does the ruble rate. Record-setting high oil prices also give a strong budget surplus. Real yields (i.e., yields net of inflation) for OFZs are the strongest among the largest developing countries – at the level of 4%-5%. As a result, it is very likely that the regulator will leave the key rate at 7.25%." 

Yuri Kravchenko, Senior Analyst of IK Veles Capital, does not expect a change in rates: "We believe that at the meeting on September 14th, the regulator will maintain a key rate and tighten rhetoric regarding inflation risks, but at the same time try to" not to exaggerate "the geopolitical risks. While observing the acceleration of inflation and the increase in rates on the monetary market, it should be remembered that the Central Bank has maintained its maximum conservatism since the end of the 2015 mitigation cycle by carefully reducing the rate even when inflation fell to historic lows. As a result, the Central Bank kept a "stock" in case of a sharp change in market conditions: even taking into account the August acceleration of the price growth rates, the current key rate is almost 2.5 times higher than the annual inflation. In today's conditions of increased volatility, a slight increase in the key rate by 25-50 basic points can only assure market participants of the regulator's concerns about the current situation and twist the knife. So, in December 2014, the Central Bank first raised "in an unsure manner" the rate from 9.5% to 10.5% and further provoked the speculators and spurred on further play against the ruble. Within a couple of days, the regulator was forced to raise rates to 17% per annum, trying to restrain the outflow of capital and the flight of investors from the Russian market. The current macroeconomic situation is fundamentally different as compared to the situation at the end of 2014. The conjuncture in the energy market, the balance of the current account of the balance of payments, and the reduction in the volume of Russia's external debt are fundamentally on the ruble's side – market fears are dictated exclusively by geopolitical risks. Under the influence of these risks, even a sharp increase in the key rate will not help deter foreign investors, but at the same time may increase the negative pressure on the market if the financial system happens to be under the impact of new sanctions."

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