The ECB rate hike will not save the situation

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The Bank of Russia at the last meeting of the Board of Directors left the key rate unchanged at 7.5%. The reason for this decision of the regulator was the stabilization of the situation in the economy and currency, debt and money markets. Liquidity problems is also not observed.
However, next year the Central Bank expects acceleration of inflation to 5-5,5% and slowdown in the economy to 1.2% and 1.7%.
This means that the Bank of Russia may still decide to increase rates. It seems that to assess the feasibility of further increasing the key rate, scheduled taking into account the inflation dynamics and Economics in relation to the forecast, and given the risks from the external environment and the reaction of financial markets.
It is noteworthy that the decisions of the Central Bank to leave the rate at its current level, the ruble on the Moscow exchange reacted to the fall. This reaction of the domestic currency due to the fact that most entities in our economy realizes that relatively high inflation, which is recognized in our Central Bank — is a negative signal for the markets, saying that the ruble will decline. To weaken the national currency there are other reasons in addition to their negative expectations. Already on 6 November, the Americans threatened to impose new “infernal” package of sanctions. And promise to continue to tighten them every month or two. Do not forget, also, that the downward correction of oil is below recent lows (WTI crude oil is 64.63 – 1 November) and record corporate payments on foreign debt in December, the month can greatly speed up and intensify the fall of the ruble.
In addition, objectively, almost all the subjects of our economic life, except for importers interested in a relatively low rate of national currency. And if the situation is compounded by a drop in oil prices (e.g., due to excess global supply over falling demand) and the impact of American sanctions against our national debt, the future of the domestic currency is seen as quite dark. Based on the aggregate impact of the above factors at the end of this year we can expect the dollar and the EURO against the ruble in the area of 72.50-and 73.80 80.60-81.80 respectively. For comparison: at the time of writing this forecast USD/RUR was quoted at 65.67, and EUR/RUR – 74.83.
Conclusion: let me remind you that the next meeting of the Board of Directors of the Central Bank, which will address the issue of the level of the key rate, scheduled for December 14. It should be noted that the possibility of the Central Bank to tighten monetary policy (increase in rate) is very limited because a significant increase in rates will lead to further decline in economic activity. And after some time will inevitably respond to the decline of the ruble, which, again, will aggravate inflation. It is a vicious circle. If in December the Central Bank will raise rates by 25 basis points (to 7.75%), then the effect will be very limited, and the ruble will fall a bit slower. If the rate will not change, then the national currency will continue to fall with acceleration.
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Andrew Perekalskiy,
The analyst of the company “Finist”