Central Bank lowers key rate — banks are ready to cheapen mortgage to 8,5%

Will the regulator’s decision cause a new mortgage boom in the housing market?

Central Bank lowers key rate — banks are ready to cheapen mortgage to 8,5% Photo: duma.gov.ru

The Bank of Russia has made a decision to reduce the key rate to 50 basis points for the first time in two years — to 6,5% a year. The message appeared on the regulator’s website immediately after a meeting of the Central Bank’s board of directors, after midday. Will borrowers-to-be benefit in mortgage loans? Here the diapason of rates might reduce by 0,3-0,5 percentage points and total from 9,2 to 95,%. Moreover, the downward movement will probably go on — towards 8,8-9% in the first months next year, an analyst from BCS Premier forecast. Only bank investors will lose: deposit rates will decrease to 6,25%.

Record-low fall

The Bank of Russia made a decision to lower the key rate by 50 basis points, to 6,50%, the regulator said on 25 October. “The Board of Directors of the Bank of Russia made a decision to lower the key rate by 50 basis points to 6,50% a year on 25 October 2019,” the official message of the Central Bank reads. The reduction is explained by slower inflation, which “is being faster than it was forecasted”. “Inflation expectations keep falling. The growth pace of the Russian economy is still restrained. A risk of a significant slowdown of the world economy persists. Disinflationary risks dominate over pro-inflationary risks in the short term,” the Central Bank added.

In these conditions, the Bank of Russia reduced the annual inflation’s forecast in 2019 from 4,0-4,5 to 3,2-3,7%. Considering the monetary policy, which is applied, the annual inflation will total 3,5-4,0% in 2020 and remain at about 4% in the future.

Will the rate fall to 6,25% in December?

In addition, the regulator gave to understand that allows a further reduction in the key rate if the situation develops in accordance with the base forecast: “If the situation develops in accordance with the base forecast, the Bank of Russia will evaluate the feasibility of a further reduction of the key rate at one of the next meetings of the board of directors. The Bank of Russia will make decisions about the key rate considering the real and expected dynamics of inflation compared to the goal, development of the economy in the forecasted period and evaluating risks of internal and external conditions and the reaction of financial markets’ to it”.

Chief analyst of BCS Premier Anton Pokatovich thinks that he forecasted the CB’s decision about the reduction by 0,5 pp as early as in August, this is why it wasn’t a surprise:

“The expectations of additional steps to reduce the key rate by 50 basis points and another 50 points in December appeared at the end of the summer. It had happened previously when the majority of analysts massively revaluated their forecasts. On the whole, we see that the rate can go down to 6,25% in December. So the reduction will be 75 basis points till the end of the year.”

The expert says it will become another driver to reduce rates of bank products. The banking sector continues adapting to the previous changes, and though the adaptation hasn’t ended, there is another reduction, Pokatovich noted. As for deposit rates, the potential for a reduction will reach 6,25% and lower in the next six months.

“The average mortgage rates might be 8,5-9% by the end of the year”

The diapason of reduction in mortgage rates, in the interlocutor’s opinion, will reach from 9,2 to 9,5% this year, and probably it will head to the level of 8,8-9% in the first months in 2020.

So Sberbank has already announced a cheaper mortgage by 0,3 pp on average from October. As a result, the lowest rate to purchase a flat in a newly built house will go down to 7,3% and to 8,8% for a ready-to-use house (considering a discount for clients who receive a salary via Sberbank, the participation in Young Family and 0,3% Discount on DomClick).

Senior economist of Otkritie bank Maksim Petronevich noted that banks regularly reconsidered mortgage rates depending on the market situation, as this allows them to fight for better assets.

“The biggest banks reconsider rates during two weeks after a reduction in the key rate. In the conditions of the expected reduction in the key rate to 6,25%, the average mortgage rates might be 8,5-9% by the end of the year against 10,4% in summer 2019,” he says.

Ak Bars Bank also expressed its readiness to reduce mortgage rates. “Against the backdrop of the reduction in the key rate by the Russian CB, big Russian banks continue lowering loan rates, including mortgage rates. We can be talking about stiffer competition in this segment. In case of the next reduction in the key rate, Ak Bars Bank will also be ready to reconsider its rates and reduce them,” the bank’s press service noted.

However, not all Tatarstan bank waited for the CB’s decision. It seems that Tatsotsbank foresaw the actions of the CB’s rate in softening the monetary policy had lowered mortgage rates beforehand. “Tatsotsbank JSC reconsidered terms and reduced rates for clients in the middle of October, before the CB considered the issue of a possible reduction in the key rate. Such a decision was made because of the understanding that the Central Bank was planning a possible reduction in the short run. So mortgage terms had been reconsidered and improved in advance. Nowadays Tatsotsbank JSC has one of the most attractive rates in the market (from 7,9% a year), this is why they aren’t supposed to fall now. But in case if other market players reacted with a significant reduction after the CB’s meeting, the bank will also make a decision fast,” Realnoe Vremya was said in Tatsotsbank.

The average weighted out mortgage rate still exceeds last year’s one by 0,5 pp, analysts note. This is why there is not great potential for refinancing now. The credits granted at 12% were refinanced a long time ago.

By Luiza Ignatyeva
Tatarstan