‘People are waiting for the economic situation in the country to worsen and inflation to surge’

At a meeting on 28 October, the Bank of Russia stressed that a decision on further change in the key rate would made considering the real and expected inflation, the process of structural transformation of the economy and evaluating internal and external risks. So it is expected that the key rate will stay at the current level or rise by 0,25-0,5 pp, head of Investment Analytics at Renaissance Credit Roman Chechushkov shared with Realnoe Vremya.

The change in the key rate the expert assumes correlates with Realnoe Vremya’s forecasts made on the basis of the Central Bank’s expectation of the average key rate since 31 October till late 2022.

What policy the Bank of Russia sticks to

Roman Chechushkov reminds us that the Bank of Russia has been sticking to the policy of target inflation in the last years. Consequently, when the price rate goes up beyond expectations, the regulator looks towards tightening the monetary policy, for instance, by raising the key rate.

“We have seen annual inflation to slow down for the fifth month in a row. In September, the price growth decelerated to 13,68%, consumer prices insignificantly increased by 0,05% in a month compared to August,” the expert clarifies.

At the same time, inflation expectations in the country remain at a high level. So the population expect prices to grow by 12,8% in October (+0,3 pp against September). Enterprises’ short-term price expectations grew too, which is conditioned by both recovered demand and change in the price for components and materials.

“By our estimates, inflation can accelerate by the end of the year and reach 14-14,5% due to the rise in prices for fruits and vegetables and imported products amid reduced supply and potential growth of foreign currency rates against the ruble,” Roman Chechushkov forecasts.

Another expert, Analytical Director of Vyberu.ru financial marketplace Larisa Guseva also told Realnoe Vremya about inflation expectations. At the same time, she saw contradiction that consumer demand decreased while prices were expected to go up.

“It turns out that people are expecting the economic situation in the country to worsen and inflation to surge, however, they themselves prefer not to spend money but save,” she concluded.

What will happen to the key rate, loans and deposits

It should be reminded that the change in the key rate is one of the main mechanisms of regulating the inflation growth pace. By lifting the key rate, the Central Bank increases the value of money and decreases the price growth. At the same time, loans appreciate but deposit rates go up too. The mechanism of raising the key rate urges people to spend less and save more, while expensive deposits help to fully or partially compensate for inflation.

“At the next meeting, on 16 December, we expect the trajectory of the key rate’s move to change, the rate will likely remain unchanged at 7,5% or will moderately increase by 0,25-0,5 pp due to the steps taken to achieve inflation targets in 2023 at 5-7%,” Roman Chechushkov notes.

In the future, Larisa Guseva specifies, the Central Bank will try to return inflation to 4%, the lowest for Russia since the formation of the market economy.

At the same time, Chechushkov says that the change in the key rate in the last months doesn’t have great influence on the ruble rate and the dynamics of loan rate. So despite the key rate was lowered from 9,5% to 8% at a meeting on 22 July, the weighted average rate in loans up to one year rose by 0,4 pp, in loans from one year it decreased by 0,3 pp compared to July.

Larisa Guseva came to the same conclusion. She relates the low impact of the key rate on the loan activity and the country’s economy with the sudden fall in imports because of anti-Russian sanctions. At the same time, there is a big imbalance between an inflow of export revenue and costs on purchasing foreign products.

Roman Chechushkov adds that deposit rate respond to a change in the key rate more: in August, weighted average rates in deposits less than a year dropped by 1,11 pp in those longer than one year did by 0,69 pp. In case the key rate is raised by 25-50 bp at the next meeting, loan rates can grow by 0,5-1 pp, deposit rates can remain unchanged.

“In case the key rate is lowered, we don’t expect the rates in loans and deposits to change. At the moment banks do not rush to lower loan rates because of an increased risk of the population’s insolvency,” he says.

At the same time, Larisa Guseva explains that deposit rates are calculated in a formula: minus 1-1,5% from the key rate. However, during crises, banks have a big outflow of money, therefore banks have to offer depositors more profitable terms and pay them more to keep the attracted capital.

“This is happening right now, in autumn 2022, after the announcement of partial mobilisation. Banks are increasing deposit rates. Short-term deposits (3 or 6 months) are becoming more expensive faster. While short-term deposit interest surpasses the Russian Central Bank’s key rate (7,5%) by 1-1,5%,” she notes.

Also, Larisa Guseva says that savings account rates, not deposits, grow faster than the key rate. And now there has been seen a tendency for transferring money there. So people can get a bigger income and don’t run the risk of losing interest like they do when closing deposits in advance.

How loan rates change

According to Roman Chechushkov, the slowdown of the economy in Russia causes the risk of an increased number of jobless citizens and a fall in salaries. This, in turn, reduces the population’s solvency and forces banks to raise loan rates, including in mortgages to cover loan risks with the interest profit.

According to Dom.RF from 30 September to 28 October, the expert adds, the top 20 mortgage banks raised mortgage rates for second-hand homes by 0,54 pp — to 10,74%. The growth in the new housing market turned out to be a bit greater — 0,55 pp, to 10,64%.

“The rise in loan rates can lead to the appreciation of borrowing money to develop a business, however, current state support programmes for backbone enterprises and small businesses will allow somehow decreasing the negative effect,” concludes Roman Chechushkov.