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Experts do not expect rate review – consensus forecast of Cbonds

February 08, 2019 | Cbonds

Today, the first meeting of the Bank of Russia on monetary policy of this year will be held, at which a decision will be made concerning the amount of the key rate. In December, the Bank of Russia increased the indicator by 25 basis points – up to 7.5% per annum. Analysts polled by Cbonds believe that the Central Bank will take a break and will not reconsider the level of the key rate. The argument in support of this decision is traditionally the inflation rate, which is within the range predicted by the regulator – 5-5.5% year to year. Economic growth disruption in the setting of a decline in consumer demand, a relatively calm geopolitical situation, and a stronger ruble could also be the reasons for maintaining the current indicator. According to experts, the comment of the Central Bank will remain moderately tough and may imply rate review in the future.  

«In general, the reaction of the economy to the increase in VAT was quite moderate, – notes Anton Struchenevsky, Executive Director, Chief Economist, Sberbank of Russia, – according to the results of the first four weeks of the year, prices rose by 1%. There is still some uncertainty, since the data on inflation according to the results of the month may differ slightly compared to the sum of weekly indicators. This is due to the fact that the weekly inflation indicator is calculated based on a narrower number of goods and services than the monthly inflation indicator. Nevertheless, if the data for the entire month does not differ significantly from the trends observed during four weeks, the Central Bank will leave the key rate unchanged. The decision at the March meeting will be determined to a large extent by the dynamics of prices in February and March. If the cumulative inflation does not exceed 2.4% (that is, in annual terms, it will be within 6% by the end of March) according to the results of the first quarter, it is highly likely that the key rate will be maintained at the current level.» «I expect that the key rate will remain at the current level, and the comment of the Bank of Russia will be cautious, moderately tough». 

Valery Weisberg, Director of Analytical Department, Investment Company REGION, evaluates the outcome of the meeting: «On the one hand, the inflation picture is somewhat better than the expected one. However, it is too early to judge what the peak will be. The proinflationary factor in the form of selling of deferred purchases of exchange will be insignificant in the first quarter, but its role may increase later on. In addition, external risks remain – trade wars and sanctions.» 

According to Dmitry Dolgin, Chief Economist for Russia and CIS, ING Wholesale Banking Russia, there is a number of prerequisites for maintaining the level of the key rate: «We expect to keep the rate in February. Inflation at the level of 5% y/y in January is at the lower boundary of the forecast range; GDP growth accelerated to 2.3% in 2018 due to net exports while domestic demand slowed down, and Global Central Banks soften their rhetoric. At the same time, if the Central Bank confirms in its comment concern about the rising inflation expectations of the population and companies, the risks of further acceleration of inflation and deterioration of external conditions, this would indicate a high likelihood of a rate increase at the meeting on March 22nd.»  

«I do not expect a change in the rate at the next meeting, – says Vladimir Tikhomirov, Chief Economist, BCS Global Markets, – the Central Bank will comment on the expected weakness of the economy at 1% per year in the setting of a decline in demand caused by rising inflation. The Bank of Russia may slightly adjust its expectations for the peak of inflation in March-April compared to the current indicator of 5.5%-6%.» 

«We expect that the rate will remain unchanged at 7.75%, as the current inflation dynamics (1% for January 1st through 28th, according to the latest data) fits into expectations. The Central Bank will build its rhetoric in such a way as to orient the markets to keep rates at the current level in the future. We do not expect the rhetoric to soften,» clarifies Valeria Volgareva, Analyst, Alfa-Bank

«In our opinion, the rate will remain at 7.75%,– confirms Yuri Tulinov, Head of the Market Research Department and Analyst, ROSBANK, – factors are still looking toward accelerating inflation in the coming months, which means that the tone of the press release will remain moderately tough.» «I do not expect rate review,» agrees Irina Lebedeva, Senior Analyst, URALSIB Bank, «The main arguments in favor of this decision are inflation growth below expectations and the Central Bank’s slowdown in economic growth in the fourth quarter of 2018, which continues even right now. The Central Bank’s comment will be moderately tough; it should provide the opportunity of both keeping rates at a meeting in March and raising them. Perhaps, it will be indicated which factors the Central Bank will take into account at the time being and under which scenario the increase will become more likely.» 

«We expect the Bank of Russia to leave the key rate unchanged to determine how the recent increase in VAT affects inflation and its forecasts, – commented Oleg Kuzmin, Chief Economist for Russia and CIS, Renaissance Capital, – Although we are now seeing the growth of inflationary expectations, we believe that it was quite expected by both the regulator and the market. If the peak CPI value in March and April does not exceed 6%, no further rate increase will be necessary. This may indicate that inflation will accelerate solely due to factors affecting the supply. The influence of secondary effects on inflation dynamics (for example, deterioration of inflation expectations) is not visible, which means that inflation dynamics in the future remains under control (especially in the setting of fall in consumer demand). If our inflation forecast does not prove true, and the Central Bank will raise the rate by another 25 bp in March, this will mean the end of the rate increase cycle. However, as our scenario analysis shows, if new sanctions are imposed on Russia, while oil remains at current price levels (65 USD/barrels), the rate of the Bank of Russia can range from 9.25% to 11.5% at the end of 2019». 

Dmitry Kharlampiev, Analytics Director, Candidate of Economic Sciences, Otkritie Bank, also does not expect an increase in the key rate: «We are counting on a neutral decision of the regulator – maintenance of the key rate at the level of 7.75%. In the longer term (middle of 3rd – beginning of the 4th quarter of the current year), in the event of inflation damping and in the absence of new external shocks, it is logical to expect the return of the Central Bank of the Russian Federation to the monetary policy easing cycle. In the event of a significant increase in volatility in the financial market leading to an increase in inflation risks and a possible excess of CPI of the current baseline forecast of the Central Bank of the Russian Federation for inflation, the regulator may resort to additional monetary tightening». 

Alexander Kudrin, Independent Expert: «I believe that the rate will remain unchanged, and the regulator's comment will be neutral. The inflation dynamics at the beginning of the year turned out to be better than expected, which will allow the Central Bank not to resort to the next rate increase». 

«As of January 28th, 2019, for the first time since January 2017, the growth rate of inflation reached 5% in annual terms. Nevertheless, its acceleration in early 2019 was the result of an increase in the VAT rate and part of utility rates, as well as the weakening of the ruble at the end of 2018. The rise in prices at the beginning of the current year corresponds to the Central Bank's forecasts for inflation reaching a maximum in the first half of the year. Therefore, while the regulator did not change its forecast range of 5%–5.5% at the end of 2019 – notes Yury Kravchenko, Senior Analyst, Veles Capital, – The financial market situation has stabilized since the last meeting of the Central Bank. On the geopolitical front, since the beginning of the year, there is a certain lull, which, along with the growth of quotations of oil and currencies in the EM markets contributed to the strengthening of the ruble. We believe that in such conditions the regulator will keep the key rate at the level of 7.75% per annum; however, it is conceivable that another rate increase might occur at the nearest meetings».  

«The increase in the Central Bank's rate reduced the share in total lending to non-financial entities: for loans over 1 year – to 24%–25%; for loans for more than 3 years – up to 9%–10%. From September to November, rates for the real sector rose: on loans up to a year – by 22 basis points; more than three years – by 40 basis points. While the share of card products is large in the growth of loans by +46%, and the share of business is significantly less than that, the Bank of Russia can point with a comment that there is a possibility of increasing rates by 25 basis points, but not to increase this benchmark in practice, because otherwise this can provoke an increase in the scale of non-return of loans by natural entities that, under current conditions, are still able to refinance,» believes Mikhail Krylov, Director of the Analytical Department, Golden Hills-Kapital AM.  

«We are not talking about the rate increase, – says Andrey Khokhrin, a partner of the Modern Standards of Business Bank, – the last two increases were not a preemptive action by the Central Bank, but rather a reaction to the global stock psychosis. Now the external environment adjusts the megaregulator to maintain or reduce the key rate: The Federal Reserve System announced its readiness to mitigate its policies; the European Central Bank is continuing its cash liquidity promotion programs. The global line of central banks – temporary easing in order to restore investment and consumer confidence. Among the internal factors of the rate reduction are the growth of the stock and bond markets in Russia, as well as the strengthening of the ruble with a parallel depression in consumer demand and business sentiment. It is most likely that the key rate will be maintained at the level of 7.75%. Financial indicators – the yield of ruble government bonds and the cost of money in the interbank market and exchange sale and repurchase agreement – are consistent with the current rate. If foreign policy tension (the situation in Venezuela, the treaty on the disposal of short and medium-range rockets) provokes a new unpredictable sanction strike and another outflow of foreign capital, it is better to retain the rate».

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