Why the Bank of Russia is to raise key rate this week

09:00, 12.12.2023

The Central Bank about to set a record

The Central Bank is likely to raise the key rate at the next meeting scheduled for 15 December to support the weakening ruble. This is going to be the fifth change of this parameter in 2023 that hasn’t yet ended. At the same time, the experts surveyed by Realnoe Vremya consider that it can grow from 50 to 200 basis points.

“We assume that a 16% key rate rise can become the main scenario for the Bank of Russia, since inflation hasn’t slowed down significantly, the population’s inflation expectations in November have notably risen, tensions in the labour market are not decreasing, the dynamics of lending and domestic demand remain too high, though the growth of mortgage and consumer loans has decelerated. Inflation and GDP are expected to grow in 2023 more than forecasts of the Bank of Russia made in October. A stronger ruble rate could have become one of the disinflation factors. However, now it has started to weaken amid cheapening oil,” says head of the Department of Macroeconomic Analysis of Finam Olga Belenkaya.

The expert doesn’t exclude an interim option — to raise the key rate slower, for instance, by 50 b.p.

“Central banks try to reduce the change margin when the rate approaches the possible peak to be able to carefully evaluate consequences of previous rises. There are more dramatic key rate rise forecasts in the market than 16%. However, it turns out they are justified if the current inflation rate exceeded September high given the season or financial stability threats the Bank of Russia doesn’t see now required additional tightness. Also, data on inflation in November and the next block of weekly inflation can influence the regulator’s decision,” Belenkaya added.

Head of the Department of the Bank and Monetary Bank Analysis of VELES Capital Yury Kravchenko also thinks that “the weakening in the last few days is just increasing the possibility of a new tightening monetary policy.”

“Lower supply of currency in the market after the end of the tax period and weak oil rates (Brent went down below 75.6 on Wednesday) remained factors of pressure on the ruble. Also, reaching ruble highs in November at the peak of the tax period will probably be evaluated by market players as a good opportunity to buy a foreign currency during the reduction of currency liquidity at the beginning of a new month and on the threshold of a traditional surge of public expenditures in rubles at the end of the year,” the expert goes on.

Stock market expert of BCS World of Investments Valeria Yemelyanova thinks that the imbalance between currency demand and supply has become chronic in the last year.

“It became possible to hold the rate for some time in autumn, but the tax period ended, December with its big expenditures in rubles is here, and the negativity has started to overweigh for the national currency on some days. Nobody can guess where these swings will stop by New Year’s Eve. Fluctuations around the equal rate continue in the basic scenario. Given pent-up inflation in the last few years as well as current budget parameters and oil prices, the middle of this range is a bit higher than 92 rubles. Perhaps, we will see this in January, around 90-94,” the analyst forecasts. According to him, the “American” cannot go up 95 rubles.

“I wouldn’t consider 95 rubles yet. It is a complete and somewhat psychologically important bar. If the dollar tries to get closer to it, currency sellers can put effort to take the rate as low as possible,” Yemelyanov thinks.

Currency swings

Late last week President and Board Chairman of VTB Andrey Kostin claimed he didn’t see reasons for the Russian national currency to seriously strengthen or weaken.

“It seems to me the rate weakened after these measures (Editor’s note: the order on mandatory sale of revenue in a currency) worked, and then it started to gradually decline. But I think it will be above 100 rubles again until the end of the year, to be honest. It will be about 90 or above 90 rubles,” thinks Kostin.

The USD/RUB rate was 92.21 rubles on Monday, 11 December, after the start of the session at Moscow Exchange. The Russian national currency managed to keep 80 kopeks compared to the level on Friday evening, 8 December. As of 10.30 Moscow time, the dollar gained 32 kopeks.

It should be reminded, the American currency went below 88 rubles for the first time since 30 June. However, the following day, the trend for a stronger ruble ended. On 6 December, the dollar surpassed the bar of 93 rubles reaching 93.005 at a moment.

Galiya Shakirova