CB key rate at an all-time low. But effect to appear in several quarters

Historic decision

The regulator’s decision reduced the key rate to a record low on 19 June: the CB of Russia reached the all-time low of 4,5% having decreased the rate by 100 basis points at once. The regulator’s course for softer policy goes on, but one shouldn’t wait for an instantaneous positive effect:

“The effect for the economy will appear in 3-6 quarters,” Chairwoman of the Bank of Russia Elvira Nabiullina claimed. She said that this level could have been reached earlier, as early as in spring, but the course for softening was interrupted “because of the volatility in markets”. As we remember, the volatility was linked with two factors: turbulence in oil markets and the coronavirus pandemic.

The goal for inflation is 4% a year, while as of 15 June, it was about 3,1%. The stronger ruble in May-June will additionally support it in the next months.

Disinflation factors turn out stronger

After the announcement of the dramatic decision of the board of directors on the historic reduction in the rate, Chairwoman of the CB Elvira Nabiullina gave a detailed comment for the press.

The course for softer monetary policy goes on mainly because the economy is getting out of the self-isolation regime, and it is necessary to stimulate demand, she explained. Disinflation factors lasted longer than expected — the restrictive measures in Russia and in the world have dragged on.

“The influence of short-term pro-inflation factors mainly ran out. Risks for financial stability because of the situation in global financial markets have reduced. Inflation-related expectations of the population and businesses have gone down,” Nabiullina said.

The exit of the economy from the coronavirus situation can take more time than planned. The fall in GDP might be bigger than forecasted 8%, but it “won’t go down below 10%”. However, the basic macroeconomic scenario of the CB doesn’t envisage a second wave of the coronavirus, Nabiullina said.

“The low economic pace is the reality we will consider it for long,” she noted and added that the World Bank had a worse outlook of the world economy in 2020. According to her, the fall in demand turned out deeper than expected, while negative rates dominate the world’s financial markets.

What’s after 4,5%?

It’s going without saying that the federal mass media were more concerned if the CB was getting ready to lower the rate further? The head of the regulator replied evasively:

“The CB sees room to reduce the key rate when fulfilling the basic macroeconomic scenario.”

However, she clearly gave the audience to understand that this sudden decision shouldn’t be considered as a transition to new standards.

“The decision made at the meeting of the board of directors on sudden reduction in the key rate by 100 basis points shouldn’t be considered as a transition to a new standard to make decisions on monetary policy,” Nabiullina said. “We will keep evaluating the feasibility of additional measures to soften our monetary policy, reduce the rate. Nevertheless, you know our approach in general: to move step by step looking at all effects, analysing all incoming information.”

Banks’ profitability seriously reduced, but there will be some anyway

The state of banks that experienced a big shock was also mentioned. Russian banks reduced net profit to 0,5 billion rubles in May 2020. Nevertheless, the head of the CB looks at their future optimistically:

“The indicators in May were one of the lowest in profit. June can be a bit better (we’ve not received data yet),” she admitted.

The CB doesn’t expect losses at the end of the year:

“We don’t expect losses in the banking system in general, there might be some income. And considering that banks earned enough profit during the first months and the economy is recovering gradually, we think banks will anyway have profit,” Nabiullina forecasts.

At the same time, she admits that when restricting debts big banks might get non-core assets that would influence their balance when borrowers’ capitalisation increases. “It might be reasonable to convert the debt into capital,” she assumed. Moreover, it isn’t planned to create a fund of bad debts.

Banks’ deposits have increased by 0,4% in June after three months of the stall.