Central Bank of Russia ready to lower key rate

Below 6% per annum

The Central Bank's key rate (which is currently 6% per annum) may be reduced by the end of April. This unexpected forecast was made on 17 April at the next weekly press conference of the head of the Central Bank, Elvira Nabiullina.

Every Friday, the head of the Bank of Russia summarizes the operational weekly results of how effectively financial measures have been introduced to mitigate the effects of the pandemic on the economy. Next week, the regulator's monetary policy board will meet to determine the next decision on the key rate. And on 17 April, Nabiullina openly sent a signal that the regulator may reduce the key rate.

Thus, the head of the Bank of Russia made it clear that the course for further relaxation of monetary policy will continue despite the deterioration of the economic situation in the country. “We believe that the main option that we will consider will be the possibility of reducing the rate. I think that we will consider it in detail in different economic scenarios, including the size of steps that can be taken.” At the same time, she stressed that “a rate increase is unlikely”, thereby negating the assumptions of many Russian economists.

However, the question remains open as to what is the limit of the Central Bank's determination to ease the rate in this principled policy. Answering questions from the media, Nabiullina once again repeated that “there is space for a rate cut”.

The IMF forecasts a 5% decline in the Russian economy

This week, the price of Urals crude oil again fell to 15-16 USD a barrel. The head of the regulator said that at the meeting on April 24 a new forecast from the Central Bank would be presented for the cost of oil, which “is now at lower levels” (than is stipulated in the budget of the Russian Federation — editor's note). “This will not be a specified forecast, but a completely revised one. We will be more conservative," she explained and suggested that a large-scale OPEC+ agreement to limit production should help restore the balance of supply and demand in the world market more quickly.

Despite this, this year will be quite difficult for the world economy, the head of the Central Bank believes: “The IMF forecast published this week suggests a decline in the world economy by 3% in 2020 — more significant than during the global financial crisis of 2008-2009.” For the Russian economy, the IMF forecasts a decline of 5%.

Regional banks will be connected to salary loans

Another topic of the briefing was a preliminary report on how the first package of measures to support the economy is being implemented. The head of the Central Bank said that 10 banks have signed agreements with the Bank of Russia to participate in the programme of preferential refinancing of SME loans at 4%. Progress is evident: there were three a week ago.

“Salary loans at zero percent for SMEs under this programme are still weak," the head of the Bank of Russia admitted. But still, according to her, interest-free loans have been issued for 1,1 billion rubles — 10 times more than a week ago. The pipeline has started working: applications have been submitted for 11 billion rubles, and approved for 3,5 billion rubles. Now five federal banks have joined the programme (instead of the previous three). The Central Bank of Russia expects regional banks also to join it. This will be facilitated by the allocation of VEB guarantees to a wide range of banks, which will significantly speed up the process of issuing salary loans, the head of the Central Bank noted. Later, she explained to reporters what she sees as the motivation of banks to issue zero loans if they themselves receive funding from the Central Bank at a rate of 4% (which means they are at a loss). “These rates are subsidized so that banks have solvent borrowers," she said.

But banks continue to confidently restructure loans to small businesses. 75% of the considered applications were approved, the head of the Central Bank said. From March 20 to April 15, 2020, entrepreneurs submitted slightly less than 60,000 applications. Thirteen percent of borrowers were rejected — mostly those who do not belong to the affected industries, or because of a damaged credit history.

To activate the process, the Bank of Russia extended regulatory relaxation on reserves for restructured loans to all sectors, not just those recognized as affected by coronavirus. Nabiullina said that large enterprises can also get loan repayment holidays.

Mortgage holidays received by 80% of applicants

The highest approval rate for credit holidays has been for mortgages — 80%. For consumer loans and credit cards, banks made a positive decision on restructuring in about half of the cases, while car loans received only 7,4% of approvals. The refusal to grant credit holidays has been mainly due to exceeding the maximum loan amount (in more than 68% of cases of refusals).

Banks can lose up to 20% of commission income

In the context of the coronavirus pandemic, banks closely interrelated with borrowers. According to the Bank of Russia's forecast, by the end of the year they may lose up to 20% of commission income, as they are restructuring to preserve the creditworthiness of borrowers. Revenue from cash and settlement services may recover in the future — along with the economy.

“There may not be a strong impact on the interest margin, as banks approached the crisis with sufficient capital and liquidity, in good shape. Last year, they received record-breaking profits, and we recommended that they do not pay dividends," the head of the regulator said. Therefore, the Central Bank does not expect large-scale stress for Russian banks, which they experienced in 2014.

Deposits will not be affected but will tighten supervision of credit tricks

The head of the Central Bank noted that the accumulated profits of banks can become a source of their recapitalization, the state will not participate in this. Nabiullina ruled out a new purge with the revocation of licenses on the model of 2014. “We have done a lot of work to improve the banking system. Of course, there may be some cases, but it will most likely not be related to the crisis or the situation with the spread of the pandemic," she said.

The Bank of Russia hastened to reassure depositors today: it will not impose a moratorium on withdrawing deposits from the population. According to Elvira Nabiullina, this is not necessary, since banks have accumulated market collateral for 7 trillion rubles and there is another 2,5 trillion rubles of additional funding. “There is no reason for such concerns. First of all, this is impossible either legally or in a legal way.”

At the same time, the Central Bank is preparing to fight to eliminate the practice of unfair sales of credit products. According to Elvira Nabiullina, there were two options for regulating this problem — through the institute of self-regulation or through state regulation. The first one didn't take place, so the Central Bank is going to introduce supervision. “We need to promote this bill faster," she concluded.