The Central Bank’s decision on the key rate on April 25: forecasts for when the reduction will begin

The time to lower the key rate in Russia will not come soon

The Central Bank of the Russian Federation will keep the key rate at 16% on April 25. The time for reduction has not come.

The upcoming meeting of the Bank of Russia on the key rate on Friday can be considered technical: the market does not expect any fundamental decisions from it. The current rate of 16% per annum was set in mid-December 2023. Too little time has passed to be able to talk about the effectiveness of the measures taken to slow down inflation and reduce credit appetite.

When might the key decline begin?

At the meeting of the Central Bank of the Russian Federation in February the year before last, the regulator signaled that the cycle of key reduction would begin closer to the second half of the year. Last year, in March, the Bank of Russia toughened its own rhetoric, declaring that it would soften conditions strictly in the second half of the year. As a result, analysts are not expecting news from this Friday’s meeting. They believe that some progress can begin only at the next, June meeting. However, traditionally, attention will be focused not on the rate itself, but on the interpretation of the regulator’s signals between the lines of the press release: whether the vague postulate about the start of the decline in the second half of the year will remain or a more specific period will be designated.

With a high key rate, the Central Bank of the Russian Federation is trying to return inflation to its target of 4% per annum. At the beginning of last week, according to Rosstat, it fixed at the level of 7.83% per annum. It is also impossible to restrain lending activity: corporate debt in banks increased by 1.8% in March after the February figure of 0.6%. Consumer lending, according to preliminary data, also accelerated – from 0.9% in February to 2% in March, according to a review by the Central Bank of the Russian Federation. Demand, on the one hand, is provided by transport and oil and gas companies; on the other hand, in retail the regulator associates it with the population’s confidence “in future incomes, taking into account the situation on the labor market.”

The Central Bank of the Russian Federation is trying to balance. Inflation cannot be reduced due to a set of conditions: a shortage of personnel (in some areas, business is forced to increase employee salaries), the growing volume of subsidies and payments to citizens, as well as obvious imbalances in production. “In an economy growing very moderately due to an unprecedented budgetary impulse, the strictness of the Central Bank is an almost obvious act of prudence, but a tactical one,” says financier Andrei Khokhrin. “We now have two parallel financial realities: subsidized and not – the first is in full swing, the second is fading.” .

As a result, none of the analysts interviewed by DP believes that the rate will be changed at the upcoming meeting – lowered or, on the contrary, increased. Although surprises cannot be ruled out.

Anton Kravchenko, head of the shares department of Management Company Pervaya, believes that the pause in the key actions of the Central Bank of the Russian Federation may last until the fall due to high domestic demand, which continues to grow even with a tight monetary policy.

“The space for reducing the key rate in 2024 looks limited due to the high risks of increased consumption,” he notes.

Shortly before the meeting, the regulator traditionally conducts a survey of leading financiers. According to the results, aggregate expectations for the average annual key rate turned out to be increased compared to the March survey over the entire horizon: for 2024 – up to 14.9% per annum (+0.4 p.p.), for 2025 – up to 10.4 % (+1 p.p.), for 2026 – up to 8.1% (+0.6 p.p.). The estimate of the neutral key rate has not changed – 7% per annum. However, the rise in expectations began immediately after the regulator’s harsh statements that it would keep the key rate high for exactly as long as needed, that is, at least several more meetings in a row.

A number of economists note that the reason for maintaining the current rate may be the slowing inflation expectations of the population. So, in April, according to the Central Bank of the Russian Federation, they decreased from 11.5 to 11%. Also last week, data on manufacturing inflation was released, which once again confirmed that it remained at a high level, but showed a timid downward trend. The producer price index in February rose to 19.1% in annual terms against 19.5% in March.

How the market reacts

The Central Bank of the Russian Federation has already said that stable dynamics of decline are important to it. What is happening now may be due to seasonal factors. Therefore, he will maintain a high key rate until inflation really stops fluctuating in different directions month to month.

At the same time, the stock market is in a state of waiting for the start of the key reduction cycle, or at least for the regulator to designate a more specific period when the process can begin. OFZ yields are beginning to decline, which indicates demand for them from investors. Thus, the yield of the RGBI index portfolio at the end of last week decreased by 11 bp. p., up to 13.53% per annum. Investors are trying to fix conditions on “long” bonds, assuming that subsequent placements by the Ministry of Finance may have lower yields. “The restoration of optimism is primarily due to growing expectations of a possible softening of the signal regarding the specification of the timing of the likely reduction of the key rate,” says Dmitry Gritskevich, manager for analysis of the banking and financial markets of PSB.

The period of high rates on bank deposits is also coming to an end. According to the Financial Services project, by mid-April, compared to the first week of the month, the index of deposit rates in the top 50 largest banks increased slightly – by 0.01–0.02 percentage points. In fact, this is a technical change. As a result, the index values, depending on the terms of deposits, amounted to 12.96–14.75% per annum.

However, the regulator, through its restrictive measures, made sure that even if the key rate remained at the current level, deposit rates would no longer rise. Last Monday, the board of directors of the Deposit Insurance Agency (DIA) decided to renew, from July 1, 2024, the premium on contributions to the fund for banks whose deposit rates are 3 percentage points higher than the market average. As a result, if they do not reduce them to the market average, then payments will increase from 0.12% of the average daily balance (base tariff) to 0.48% (+0.36% to the base rate). The Central Bank of the Russian Federation calculates the average market indicator differently than Financial Services (as a rule, it is lower due to Sberbank and demand deposits). In any case, in order not to risk increased deductions, banks will begin to massively reduce rates, further lowering the market average.