The peak of the key rate growth to be reached in Q1 2025
Experts on the final meeting of the Board of Directors of the Central Bank of the Russian Federation on the rate this year
This week, the Central Bank will make the last decision on the key rate this year. Keeping it at 21% with the current inflation level is unlikely. Experts believe that the Bank of Russia will decide to increase the rate by 2 percentage points at once, to 23% a year. A gradual reduction in the key rate can be expected no earlier than the summer of next year, economists predict.
“An increase in the rate to 24-25% cannot be ruled out”
The upcoming meeting of the regulator will be the last this year, but not a “pivotal” one, without updating macro forecasts. “In our opinion, the board of directors will most likely have options on the table to keep the rate at the current level of 21%, to increase it to 22% or 23% — all these options are within the framework of the October baseline forecast of the Central Bank. Based on the latest inflation data, it cannot be ruled out that options for a stronger increase in the key rate — to 24-25% — may be discussed, but the likelihood of such a decision at the December meeting seems insignificant,” commented head of the macroeconomic analysis department at FG Finam Olga Belenkaya.
The fact that the rate will most likely be increased is also evidenced by some actions of market players — the largest banks have already begun to increase rates on deposits, without waiting for the Central Bank's decision. VTB has been raising rates on short-term deposits in rubles since 17 December. The bank will offer new clients or those who bring “new” money up to 24% a year for six months and 23.7% a year for three months. Earlier, Sberbank also raised rates: for savings accounts up to 18% a year for the first three months, subject to certain conditions.
For deposits, the bank offered a maximum of 22.5% a year for six months, but only for amounts over A million rubles and subject to certain requirements. On 6 December, Alfa-Bank raised deposit rates to 24% a year for a period of nine months to three years for new clients or those who have not kept money in the bank recently.
In her opinion, the inflation-related consequences of the November weakening of the ruble have not yet been fully realised, and at the beginning of the year the effect of large-scale budget expenditures in December may be felt. Based on the estimates of the Ministry of Finance for the entire year, preliminary results of 11 months of 2024 and the budget breakdown, December expenditures may amount to 6.37-7 trillion rubles, or 16-17% of the total volume of annual expenditures. Next year will start with a higher inflation point (according to Finam, from 9.2%) and the probability of its reduction by the end of 2025 to the projected 4.5-5% is becoming even lower.
Until now, the Central Bank considered the main cause of inflation to be a significant excess of domestic demand over production capacity, and the tightening of monetary policy (MP) was aimed at eliminating this positive output gap and returning the economy to a balanced growth trajectory. Now, Central Bank analysts note a gradual slowdown in demand growth and a significant increase in the contribution of supply factors to the current price dynamics.
“These are important conclusions: as is known, the MP affects inflation through its impact on demand, but cannot affect supply factors. The decline in the contribution of demand to inflation confirms that the tightening of the monetary policy is working, and the monetary policy should respond to supply-side shocks such as harvest, temporary panic in the currency market, and higher tariffs and recycling fees only to the extent that they affect inflation expectations,” the economist explains.
The Central Bank’s materials provide the first confirmation of the long-awaited slowdown in corporate lending in November and the ongoing slowdown in retail lending growth. According to Central Bank analysts, the credit impulse continues to decline, and lending dynamics are making an increasingly smaller contribution to the expansion of aggregate demand in the economy. They expect that in the future, more restrained lending and the return of the budget to the parameters of the budget law will influence the slowdown in price growth planned from 2025. To return to low inflation, it is necessary to maintain tight monetary conditions for a long time, but the Central Bank of the Russian Federation is no longer talking about the need for their further tightening.
The regulator will have to make a decision in December in a difficult situation. On the one hand, despite the record value of the key rate, inflation has not yet begun to slow down and is above the regulator's forecast. In addition, the volatility of the ruble exchange rate has increased, and its November weakening will still be transferred to price growth. Inflation expectations of the population remain at their maximum values since the beginning of the year, and price expectations of enterprises continue to grow and in November reached their maximums since 2022.
In the latest consensus forecast of analysts, inflation forecasts are significantly increased and correspond not to the baseline, but to the pro-inflationary scenario of the Central Bank. A further increase in inflation expectations in December cannot be ruled out as a reaction to the sharp weakening of the ruble at the end of November. The growth of inflation expectations leads to the fact that, with the same level of the key rate in real terms, monetary conditions are less stringent than the Central Bank planned. However, the acceleration of inflation in November was largely due to volatile components (high growth rates of prices for fruits and vegetables and food, air travel, an increase in mobile tariffs) and a sharp weakening of the ruble in November, which was partially recouped at the beginning of December.
Monetary policy decisions are not based on the current situation in the economy, which it can no longer change, but on the future, and the effect of the December decision, as well as the increase in the key rate from 16 to 21% in the second half of 2024, will be fully reflected in the economy next year, explains Olga Belenkaya.
Businesses are concerned that a key rate above 20% and even higher rates on new market loans may lead to excessive “overcooling” of the economy or even a recession. The realisation of credit risks due to the deterioration of the financial situation of borrowers also threatens banks. The Central Bank will probably also take these risks into account. “Thus, raising the key rate to 23% may become a kind of “compromise” between today's inflation picture and the grounds for slowing inflation in the future," the economist believes.
“We are currently expecting a peak in the key rate at 23% and its gradual reduction in the best case scenario from the summer of next year to 18% by the end of 2025,” Olga Belenkaya summarized.
Financial expert, member of the Commission on Banks And Banking Activities in the Russian Union of Industrialists and Entrepreneurs, PhD in economics Yan Art expects that the key rate will be raised to 23% this Friday. “But in the current conditions, this is no longer so important,” he adds. However, the expert does not rule out that the Central Bank of the Russian Federation will refrain from raising the rate this time.
“The question is to what extent these measures will contribute to its rapid suppression. That they will, yes, but how long will the braking distance be and what price will the economy pay for it?” the economist ponders. “This is what will be actively discussed both in the Central Bank itself, and in the analytical community, and in business.”