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The ruble rose after the increase in the key rate by the Bank of Russia by 50 basis points at once, to 5.0% per annum. Experts polled by Bloomberg expected the rate to rise by 25 basis points.
Traditionally, a currency appreciates if its real yield increases. Market rates have grown for a long time – so the borrowing rate of the Ministry of Finance for a long time exceeded the 7% barrier (today 6.90%). The key rate, which indirectly determines the level of lending in the economy, turned out to be virtually non-working.
The Central Bank formally tried to stimulate the economy in a pandemic, but in fact, lending is at market rates. Incentives worked where the government had a hand – mainly in housing construction, the side effect of which was a jump in property prices and other economic distortions. Therefore, today the regulator simply increased the rate behind the market.
For carry traders, the ruble will become more attractive, especially after the reduction of the geopolitical premium, when Vladimir Putin offered to hold a personal meeting after the pandemic with the leaders of the nuclear five countries and after the withdrawal of Russian troops from the Ukrainian border. Commerzbank analyst Tatha Ghosh, who expected the rate hike by 25 bp, said before the decision that it would increase the real yield of the ruble.
“Consequently, the rise in interest rates will support the ruble in the medium term, even if today’s rise has already been factored into the price.”
According to a Bloomberg study, 28 of 41 analysts were looking for a 25 basis point increase and 13 were looking for a 50 basis point increase. Traders have been pricing 82 basis points of tightening over the next three months – prior to today’s decision.
Bank of Russia decision
“The Board of Directors of the Bank of Russia on April 23, 2021 decided to raise the key rate by 50 bp, to 5.00% per annum,” the statement said.
“The growth rates of consumer prices and inflationary expectations of the population and business remain elevated. The recovery in demand is gaining more and more stability and in a number of sectors outstripping the possibility of increasing output. In these conditions, the balance of risks is shifted towards pro-inflationary. The forecast of the Bank of Russia for inflation for 2021 has been raised to 4 , 7-5.2% “, – said in a press release from the regulator.
“The rapid recovery in demand and increased inflationary pressures form the need for an earlier return to a neutral monetary policy. The Bank of Russia will assess the feasibility of further raising the key rate at the next meetings,” the Central Bank said in a statement.
The Central Bank of the Russian Federation raised its inflation forecast for the end of 2021 to 4.7-5.2% from previous expectations of 3.7-4.2%. Inflation will return to the Bank of Russia’s target in mid-2022 and will remain close to 4% thereafter. In March, the annual growth rate of consumer prices increased to 5.8% (after 5.7% in February). As of April 19, annual inflation has slowed to 5.5%, which, however, is due to the high base effect of April 2020. The indicators reflecting the most stable processes of price dynamics, according to the Bank of Russia estimates, increased in March and are significantly above 4% in annual terms.
“This is largely a reflection of the sustained recovery in domestic demand. Its impact on price growth has been exacerbated by supply-side constraints, as well as heightened cost pressures for businesses. In the face of travel restrictions, unspent household funds have been partially redistributed on the consumption of goods and services within the country, “the regulator points out.
Population inflation expectations remain at elevated levels compared to the pre-pandemic period. Enterprises’ price expectations have increased. Professional analysts’ expectations for the medium term are anchored near 4%.