16/12/2017 |

Two Steps to Balance

Central Bank of Russia

The Central Bank lowered the key rate by 0.5 percentage points and raised growth forecasts.
The Bank of Russia decided to lower the key rate not by a standard “step” of 0.25 percentage points, but by 0.5 percentage points. The main reason for this is a change in the position of the Central Bank on economic growth in 2018: the Central Bank now does not expect a certain cooling in the economy, suggesting that it will happen in 2019. Anticipation by the regulator of the expected “schedule” of the rate cut may remove the claims to the Central Bank about too tight monetary policy (DCP) – the November failure data on industrial production (minus 3.6%) may indicate that the end of 2017 in the economy will be worse, than analysts and government departments had expected.

Head of the Bank of Russia Elvira Nabiullina at a press conference in the Central Bank, responding to a question about the unexpectedness of the decision of the regulator, explained that in the “week of silence” preceding the meeting of the board of directors at a key rate, the mood of analysts changed somewhat – the consensus that the Central Bank will reduce the rate to a standard “step” of 0.25 pp, was formed, in her opinion, this week, before market assumptions were more diverse. Nevertheless, the forecasts of investment banks that the key rate will decrease by only one step have not been justified: in 2018 the financial sphere of the Russian Federation enters with a rate of 7.75% per annum. Further decrease in the key rate already at the meeting of the Board of Directors of the Central Bank on February 9 is not ruled out, the regulator, however, confirmed that it intends to reduce the rate on previously announced principles “in the first half of 2018”. At the same time, Elvira Nabiullina did not give an opportunity to confirm the assumptions that the Bank of Russia intends to switch to a neutral DCT already in 2018, by a rate cut, but only repeated previous statements that “neutrality” is expected to be achieved in 2018-2019.

The report of the Bank of Russia on the DCT, published yesterday, details the logic of the decision of the Central Bank – at least from a formal point of view, the reason for the “double cycle” of the regulator was an improvement, and not a deterioration in the forecasts of economic development.

In October 2017, the board of directors of the Central Bank still had reason to assume for 2018 the average annual price of oil $ 44 per barrel – it was until confirmation of the extension of the OPEC + deal.

In the new forecast, the price of oil in 2018 is raised to $ 55 per barrel – this is almost the current average annual price for 2017, the Bank of Russia, in fact, confirmed the well-known thesis that the best oil price forecast is its current price. Accordingly, due to these changes, the Central Bank rejected the assumption that in 2018 the economy will grow more slowly (1-1.5% of GDP growth) than in 2017 (in the range of 1.7-2.2% of GDP ), and now believes that the growth of 2018 will be about the same as this year. The decline in GDP dynamics, according to these calculations, will occur in 2019 with a recovery in 2020. Accordingly, the Central Bank agreed that loans to the economy will grow in 2018 more quickly than previously thought, investment estimates have been changed in the direction of growth, and a forecast for capital outflows for 2017 and 2018 has been increased. The Central Bank, which does not predict the dynamics of the ruble exchange rate to the currencies within the framework of the inflation targeting concept, nevertheless assumes that the higher than anticipated oil price in 2018 will not lead to further strengthening of the real exchange rate of the ruble – that is, The same boundaries as in the second half of 2017.

It was yesterday that Rosstat’s information appeared, which allows us to assume a fundamentally different logic of the regulator. Data on industrial production for November 2017 (see “Kommersant” on Monday) are very weak, in the methodology of the department of statistics, the output in the industry fell by 3.6% year on year. On the eve of the authors of the CMAAC in an article for Kommersant, the regulator called for a more active reduction of the key rate, citing the signs that they are observing that the current DKP has a depressing effect on industrial growth. Let’s note, in itself, the reasoning of the CMACP that real positive rates in the economy are a problem for growth and can cause a change in trends, obviously, a very dislike to the Bank of Russia. Nevertheless, the decision to lower the rate by 0.5 pp instead of 0.25 pp, in itself, is not very significant in scale (in particular, the ruble movement on this news was very small, in spite of the unexpected news, – minus 0.2 rubles in the exchange rate of the ruble to the dollar), obviously, will protect the Bank of Russia from possible charges in the actual “creeping tightening” of the DCT. The head of the Central Bank admitted that he expects the same inflation as in November, about 2.5% per annum, in 2018, according to the estimates of the Bank of Russia, inflation will “catch up with” the inflation target at 4% per annum – the average annual rate expectations for it are 3.9%, in the first half of the year it will probably fluctuate around 3% per annum.

Inflation below the formal target at the beginning of 2017 can be explained both in the logic of faster falling inflation expectations and temporarily acting factors (CB version), and in the logic of influencing low domestic demand and the high cost of money (the version of some opponents As the Kommersant has repeatedly written, there are already signs of a fairly rapid return of inflation to the level of 4% now, so even a further decrease by the Bank of Russia of a 0.25% rate is unlikely to be guaranteed on February 9 – especially if we take into account that by the beginning February, the general information background associated with the possible expansion of US sanctions against the Russian Federation will be quite tense, and industrial growth and GDP dynamics may remain weak.

However, what is happening does not mean that the Central Bank has abandoned the medium-term strategy of maintaining a relatively rigid DCT – a cut in the rate of “two steps” may be tactical, it can be perceived as a signal to the markets that the regulator is ready to shift its decisions at a rate, given the current market conditions . At the same time, the policy of keeping real interest rates in the medium-term period at 2.5-3.5% clearly remains a value for the Bank of Russia to a greater extent than it is commonly believed – in the statement of the Central Bank’s Board of Directors, Elvira Nabiullina’s speech and the report on the DCT literally nothing that could be perceived as an admission of the restoration of negative or close to zero real interest rates, at least under the current leadership of the Bank of Russia.

Author: Dmitry Butrin


Article in Russian: Kommersant

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