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Business / Finance

GDP will not be offended: why the Bank of Russia raised its key interest rate themes of the day 16.09.2018 at 21:00

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Contrary to the expectations of most experts, the Central Bank on 14 September decided to raise the key rate to 7.5%. This is the first rate increase since December of 2014, when the regulator had urgently to save the ruble.

This is not a December 2014

the Board of Directors of the Bank of Russia on 14 September 2018, has decided to raise the key rate by 0.25 percentage points to 7.50%. It is the sixth meeting of the Board of Directors of the Bank of Russia on the key rate in 2018. The last time at the current level, the rate was set on 9 February — however, if it is not raised and lowered on the same 0.25 percentage points on March 23, the rate was decreased to 7.25%, and at this level it is "lived" until mid-September.

the Current regulator's decision to raise rates is important precisely because it had last increased in December 2014 when the dollar the moment was worth more than 80 rubles, and Euro — 100. Then the increase in the key rate was urgent and shock — immediately from 10.5% to 17%. Was started solely in order to bring down the panic on the currency market, and emergency purchases citizens in crazy amounts of currency, household appliances and croup long term storage.

the Current increase at the lowest possible step does not go to any comparison with December. But marks a trend reversal: the cycle of reducing interest rates on loans and deposits, as well as record low inflation in the Russian economy for some time ended. The Bank hopes that for a while.

the News of the Central Bank warned

the First signal about possible rate hike was given on 4 September. At a press conference on the eve of X Global forum of the Alliance for financial inclusion, Central Bank head Elvira Nabiullina said: "Now some factors that would speak for rate cut. There are a considerable number of factors, speaking of the saving rate. And there are some factors that make the question of a possible increase".

nonetheless, most experts were inclined to think that the Central Bank will leave rates unchanged, but will toughen rhetoric regarding the prospects of the Russian economy, that is limited to verbal intervention, hinting at the possibility of rate hike in December 2018 or in early 2019.

Publicly urged the regulator to raise the key rate before the end of the year, presidential aide for economy Andrey Belousov: "the Opportunity is there, there are some grounds for this (rate hike. — Approx., but I think that it would be highly undesirable effect because it would hamper investment activity and economic growth and will lead to additional expenses of the budget". But the Bank of Russia did not listen to these warnings. Why?

Inflation and the ruble is more important for economic growth

the Central Bank decided to stop the collapse of the ruble and to prepare for the inevitable inflation in 2019, when it will take effect the VAT increase from 18% to 20%. This will automatically raise prices on virtually all goods and services.

the Bank of Russia can not ignore the threat of new us sanctions against Russian public debt non — resident and so are actively getting rid of the Russian OFZ, which led to a sharp weakening of the ruble in August — early September. The first emergency measure, the Central Bank to stabilize the situation on the currency market — launched August 23 refusal to purchase dollars in the foreign exchange market until the end of September — did not help. It is no coincidence that on 14 September the regulator took a decision to extend the "currency pause" to the end of the year.


Another reason that influenced the decision of the Russian regulator, was the financial crisis in emerging markets, which, as it turned out, heavily dependent Russian economy. In particular, on 13 September the Central Bank of Turkey was forced to raise its key interest rate from 17.75% to 24% per annum — the collapse of the Lira against the backdrop of escalating tension in the relations between Turkey and the United States continues.

Formally the main reason why the Bank of Russia raises or lowers its key interest rate, is inflation. And not even inflation, and inflation expectations of Russians in the horizon of 9-12 months, which the Central Bank monitors using a special public opinion polls. These surveys showed that inflation expectations of the Russians are at the level of 9.9% APR, and sometimes even go to double digit level.

Current inflation rate in Russia, too, began to grow significantly in the last two months. More than a year being on the level of absolute historic lows of 2.3—2.5% per annum in August it exceeded 3%. Moreover, the main contribution to this price surge brought food inflation, the most tangible for people.

Now, the Central Bank forecasts annual inflation by the end of 2019 at the level of 5-5,5% return to target 4% only in 2020. While this is the worst inflation forecast for next year — the Ministry of Finance believed that the VAT rise will drive inflation in the coming year to a maximum of 4.5%. But its contribution to the price increase contributes to the weakening of the ruble against the background of consistent increases in imports.

Additional spending budget, about which, as about the negative effect of the rate hike said the presidential aide Andrei Belousov, now do not seem to be a significant problem. Thanks to a sharp and steady increase in world oil prices, Federal budget of Russia in January — July was executed with a surplus of 1 trillion 383 billion 299,5 million rubles, or 2.5% of GDP. That is the problem with the current implementation of the budget before the end of the year Russia had not expected. All the while global political and economic factors rather speak in favor of raising oil prices in the coming months, and certainly not in favor of a sharp fall.

as for economic growth, he still will inevitably slow down in Russia in 2019 even without new sanctions due to the increase in VAT. The Ministry of economic development lowered its growth forecast for next year to 1.4% (for comparison: in the first half of 2018, our economy grew by 1.8%, and in 2017 — 1.5%). The minimum increase in the key rate is unlikely to have any significant impact on GDP growth.

the First but not the last?

"Probably, the market will decide that this is not the last increase and the Russian mega-regulator will continue to tighten monetary policy further. Today's decision is already in prices, the impact on the ruble and the stock market will be neutral. The news, of course, will please depositors of commercial banks, it is now possible to expect acceleration of growth rates on deposits," said Director of analytical Department of "Alpari" Alexander Razuvaev.

chopping regulator's decision clearly liked — the Russian currency has risen significantly. In the early afternoon on 14 September the dollar traded higher 68,5 rubles, however, after it was announced the rate hike, the U.S. dollar exchange rate declined by 50 cents. By 14:00 Moscow time the dollar was worth 67,69 ruble and Euro — ruble 79,19, a decrease from the start of trading at 58 cents. However, the impact on the ruble more then that the regulator has reported that by the end of the year will refrain from a currency intervention. The cause of strengthening the national currency is not the growth of the attractiveness of the carry trade, and the news about the extension of the embargo of buying currency for the Ministry of Finance, Grand Capital analyst Sergei Kozlovsky. According to him, in the comments of the Central Bank no long-term strategy to change the interest rates, indicating that the recognition of the power of external factors.


Stock indices reacted to the increase in the key rate neutral. Index Masuri by 13:50 Moscow time lost 0.3%. Shares of Sberbank and "RUSAL" — in the black quotes of the oil sector fall. In the market of government bonds again started selling. The return of the index RGBITR is 8.62% since the beginning of the auction, he lost 0.38 percent.

the Long-term consequences-the first in almost four years of increasing the key rate of the Central Bank will become clear in the coming weeks. In any case, you can say that a cycle of sustained reduction in interest rates on deposits and credits ended and the Russians will have to forget about record low inflation. However, people feel inflation is higher than this is evidenced by the official statistics.

the Regulator has let know that is ready to act decisively, but gently. The minimum increase in the key rate of the Central Bank leaves good room for manoeuvre in the event of changes in economic conditions, and any variations of development of the sanctions war.