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The Bank of Russia prepares the market for a new rate hike

MOSCOW, June 11 – PRIME. The Bank of Russia on Friday for the third time in a row raised its key rate and again by 0.5 percentage points – up to 5.5% per annum. However, this is just another step of the regulator in the process of normalizing its policy: high inflationary expectations and growth rates of prices may lead to a new increase in July. “As for the rate hike in July, yes, with a high probability, but, of course, a pause cannot be ruled out either, because in our life, which is much richer than forecasts, all sorts of unforeseen circumstances may occur, there may be circumstances of this kind that will require taking pause “, – warned the head of the Central Bank Elvira Nabiullina. At the same time, the range of a new increase may again amount to 0.5 percentage points – the regulator on Friday discussed the possibility of increasing the rate by one percentage point at once. At the same time, Nabiullina stressed that the decision of the Central Bank will be determined by the situation in the economy. “We will choose the scale and pace of the rate hike based on our assessment of the level of sustained inflationary pressures, the timing of normalization of inflationary expectations, as well as forecasts of further dynamics of aggregate supply and demand,” the Bank of Russia Governor said. MIDDLE STEP Despite inflation, which accelerated to its highest level since 2016, and inflationary expectations, which are near multi-year highs, the regulator decided not to make categorical moves and chose a rate hike by 0.5 percentage points, although it discussed options for larger and smaller steps. “As for the options that we discussed at the board of directors, we heard proposals of 0.25 percentage points and 0.75 percentage points, but we discussed in detail and in detail the possibility of increasing by 0.5 percentage points and by one percentage point today. Arguments were expressed both for and against, “Nabiullina pointed out. She noted that the regulator did not go for a sharper increase in the key rate, since the economy and the financial system need to be given time to adapt to the change in the key rate, and the regulator itself needs more time to assess the effect of previous rate hikes. Experts interviewed by RIA Novosti are not surprised by the decision of the Bank of Russia: the regulator is trying to stabilize inflation expectations and influence the savings behavior of Russians, and is also concerned about the departure of inflation noticeably higher than the 4% target. Thus, at the end of the year, the Central Bank expects inflation to be higher than its April forecast of 4.7-5.2%, although lower than the current values. In addition, the economy is recovering faster than expected – the Bank of Russia did not even rule out an increase in the estimate of GDP growth rates from 3-4% in July. “The situation is now quite obvious for decision-making: the recovery is fast, inflation is high, so from countercyclical considerations it is necessary to switch to a containment policy. If the economy was recovering poorly, the main key rate drivers would pull the board of directors in opposite directions – between stimulus and containment it would be to look for a difficult balance, “commented Dmitry Kulikov, director of the group of sovereign ratings and macroeconomic analysis at ACRA. HORIZON OF MODERATE HARDNESS Nabiullina did not rule out a transition to a moderately tight monetary policy on some horizon. Such a situation will be observed if the key rate “moderately” exceeds the neutral range of 5-6%. Most analysts expect that in the third quarter, that is, following the meeting in July or September, the key rate will reach 6%. For example, Vladimir Evstifeev, head of the analytical department of Zenit Bank, believes that the regulator has left an opportunity to raise the key rate by 0.5 percentage points in July. “We believe that by the end of the third quarter of 2021, the rate will be raised to 6%. At this level, it will probably be possible to stop, since inflation forecasts for the end of 2022 are stable at about 4%,” Denis Popov, chief analyst at Promsvyazbank, is convinced … At the same time, Kulikov from ACRA predicts that the key rate hikes will end by the end of 2021 and it will be closer to 6%, “possibly slightly higher.” And Anton Tabakh, Managing Director for Macroeconomic Analysis and Forecasting of the Expert RA agency, expects that by the end of the year the Central Bank will bring the rate to a moderate level of 6.5% per annum. “If in this way inflation falls to 4% per annum by mid-2022, a neat easing of monetary policy can be expected at the end of 2022. But we must live to see that,” he concluded.

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