Time to reduce rate: why the Central Bank began to act decisively

In the coming months, the conditions for monetary policy easing may become less favorable

The Bank of Russia took a decision to reduce the key rate by 0.5 percentage points from 9.75 to 9.25% per annum. This is the second consecutive rate cut. To March 2017 the key interest rate remained unchanged for six months. In this case, such a long pause in the reduction of the key rate was announced by the Bank of Russia in September 2016 when it was announced that the next rate cut possible not earlier than the first half of 2017. Thus, the decline of the key rate in March this year — an event long-awaited.

The background is not changed

The interest is not so much the second consecutive reduction in policy rates, as the increase in the reduction step with ¼ to ½ PP If a detailed study of two press releases of the Bank of Russia (from March 24 and April 28), we can see that the reasoning of the judgment of the regulator have not undergone strong changes. Both times, there was a significant slowdown in consumer inflation to values close to the target level of 4% and indicates the preservation of inflation risks.

The current monetary policy, according to Bank of Russia continues to be moderately hard. Maintaining positive real interest rates on the loan should the intent of the regulator, on the one hand, to support model savings behavior of households, and with another — not to allow to accelerate the demand for credit, leaving amounts within the range not leading to an increase in inflationary pressures.

Similarly, slightly changed description of current processes for the recovery of the Russian economy. In both press releases noted the transition to the positive dynamics of the economy as a whole and individual indicators such as industrial production, fixed capital investment, real wages.

Themselves inflationary risks enumerated in a press release, also remain the same: a possible reduction of the propensity to save of households for a long period of stable inflation is necessary to reduce inflationary expectations and volatility in world commodity and financial markets.

Possible motives

If you only look at the explanations of the Bank of Russia, it is quite difficult to understand why in April the rate was lowered twice more than five weeks earlier. And if you take into account, for example, the dynamics of the exchange rate and consumer price index, it appears that in March, the regulator was a large degree of freedom of decision-making about the change of rate. Indeed, the consumer price index on an annual basis (last 12 months) at the end of April 2017, most likely, will not decrease for the first time since June last year. Dynamics of the rouble exchange rate in April 2017, had also deployed for the first time in a few months. If from December to March, the ruble has appreciated by 14% against the dollar and the Euro in nominal terms in April this trend was interrupted, and by the end of the month, the national currency lost around 2% against the dollar and nearly 4% against the Euro.

Based on the volatility of exchange rate and inflation, given the relatively stable the rest of the indicators taken into account by the regulator, it is logical to reduce the rate in the reverse proportion: the more rapidly in March than in April. Especially in recent press release noted that the overall scale of a possible rate cut this year remains unchanged.

Whatever the motives for accelerating the reduction of the key rate, they obviously can not be traced in official statements of a management of Bank of Russia. Therefore, from the standpoint of an outside observer can only try to guess the internal logic of this decision.

It is logical to assume that the Central Bank is trying to jump into the last car of the departing train a relatively strong ruble and slower growth in consumer prices. If indeed the scale of rate cuts this year have already been identified, the management of Bank of Russia might prefer to choose the best out of him in a relatively favorable conditions.

In the latest press release in greater detail than last time, painted risks of volatility in world commodity and financial markets. Thus stressed the presence of proinflationary factors that lie outside the competence of the Russian financial regulator. And if the external environment deteriorates, the tendency of strengthening of rouble will be replaced by a resumption of devaluation processes and the reduction of inflation will stop, other possibilities for the reduction of the key rate before the end of this year may not be submitted.

From the point of view of this logic, the Bank of Russia could take a more active rate reduction in April to refrain from its decrease in less favorable conditions, but still to ease monetary policy by year-end, to support the budding economic recovery. Illogical in the short term, the acceleration of the reduction of the key rate can be attributed to a longer-term view of the Bank of Russia on the prospects of development of the economy and the financial sector. This means that under unfavorable external conditions at the next meeting of the Board of Directors of the Bank of Russia may take a pause in the reduction of the key rate.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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