On March 17, the Bank of Russia, as expected, kept the key rate unchanged at 7.5% per annum

Mikhail Vasiliev, Sovcombank 17 March 2023 16:02

The Bank of Russia is expected to keep the key rate unchanged at 7.5% per annum.

The slowdown in annual inflation and the current low rates of price growth, which have remained below the seasonal norm for the last four weeks, are in favor of maintaining the key rate.

Since the last February meeting of the Central Bank, annual inflation has decreased from 11.8% in January to 11% in February. By March 13, annual inflation, according to our estimates, slowed down to 7.7%.

The current dynamics of inflation is still in line with the Bank of Russia's plans to return inflation to the target 4% in 2024.

At the same time, pro-inflationary risks still prevail over the medium-term horizon. Such risks are the weakening of the ruble, the expansion of the budget deficit, increased inflation expectations and a shortage of personnel in the labor market.

Therefore, the Bank of Russia is expected to keep a signal about future actions – "with increased pro-inflationary risks, the Bank of Russia will assess the feasibility of raising the key rate at the next meetings."

Today's decision of the Bank of Russia, in our opinion, will not have a significant impact on the ruble exchange rate.

At the same time, we believe that a slight gradual increase in deposit and loan rates (within 50 bps) is likely in the coming months, based on expectations of a likely rise in the key rate later this year. It is also likely that the moderate increase in yields on the OFZ market will continue, followed by mortgage rates.

We expect annual inflation to fall to 3.4% by the end of March due to the departure from the calculation base of the high March 2022 value of 7.6%. We believe that annual inflation will remain below the target 4% until June.

At the same time, we believe that if weekly inflation starts to accelerate in the coming weeks and will be above the seasonal norm, then at the next meeting on April 28, it is possible to increase the key rate by 25 bps, to 7.75%.

In the baseline scenario, we expect annual inflation to return above the target 4% in the summer and rise to 7% by the end of the year. To curb price growth, the Bank of Russia will begin a cycle of raising the key rate in the middle of the year and by the end of the year will raise the rate by 75 bps, to 8.25%.

At the same time, the risks are rather shifted towards a weaker ruble exchange rate and a higher budget deficit this year. In the event of a growing financial crisis in the West and the onset of a global recession, a further drop in prices for oil and other raw materials is likely.

The implementation of this risky scenario may require a tighter monetary policy and an increase in the key rate this year to 8.5-9.0%.

Mikhail Vasiliev, Chief Analyst at Sovcombank

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