The Bank of Russia has no strategy for 2019 when choosing situational approach

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14 December 2018, the Board of Directors of the Bank of Russia took a decision to raise the key rate by 0.25 PP to 7.75% per annum. Before addressing the opinions of experts about the actions of the regulator were divided almost equally between growth rates and the fact that the Central Bank will leave unchanged its only a small advantage of the first option. The main argument in favor of increasing the key rate was an attempt to limit the scale of inflation risks in the coming year, although the Central Bank acknowledged the existence of arguments in favor of leaving it unchanged.
However, the decision to increase the bet was made because of a number of external and internal factors. Among the external factors: the situation in the global economy, and particularly in emerging markets, the collapse of global stock markets and trade wars. It is worth noting the volatility of the oil market and the threat of the abundance of its proposal, despite the decision taken by OPEC regarding production cuts since January to 1.2 million barrels per day. Remain relevant, a number of geopolitical risks and risks of new anti-Russian sanctions.
Among the internal risks we can note the uncertainty of the response of prices and inflation expectations on the increase in VAT and the weakening of the ruble, which in the end of the year. CBA assumes that the contribution of the VAT increase in inflation may be between 0.6 and 1.5 percentage points, and the peak of this influence may come in the first quarter. The Central Bank admits that at the peak in March-April the annual inflation rate may exceed 5.5% or even reach 6%. However, after accelerating in the first quarter inflation will start to slow down. The second and third quarter inflation will return to 4% in terms of the year. Traces of the influence of single factors on the annual inflation will finally disappear in a year, in the first quarter of 2020.
As for predictions, at the same time quite realistic and conservative looks of the forecast average price of $55 per barrel Brent. It should be noted that due to budget (by currency purchase on the market by the Central Bank for the Ministry of Finance), the impact of oil prices on the ruble as long as they remain above $40, very limited.
As for the future interest rate policy of the Bank of Russia, of the recent statements by the regulator implies that he will assess the feasibility of further increasing the key rate, taking into account the inflation dynamics and Economics in relation to their forecasts, and given the risks from the external environment and the reaction of financial markets.
You can see that in this rhetoric of the regulator, not enough specifics, not enough hints, up, or down go the key rate, and maybe all will remain unchanged. However, we believe that with all the inconvenience to investors, the regulator has chosen the only right way for maximum flexibility. In conditions when growing uncertainty due to unpredictable external factors, the Bank of Russia does not want to make commitments about the future path for rates will not be able to perform. Thanks for that. The lack of information for investors is bad, but better than wrong information.
Vadim Iosub,
Senior analyst,