The Bank of Russia may use the key rate mechanism if the situation in the financial and commodity markets does not stabilize in the near future, experts interviewed by TASS believe. At the same time, a number of analysts are of the opinion that today's panic in the markets is a short-term “nervous reaction”, and it is not a reflection of fundamental reasons. In the morning, the ruble fell sharply against the US and European currencies amid a severe collapse in oil prices after the failure of negotiations to reduce oil production. So, the dollar went up to 75 rubles, and the euro – up to 85 rubles for the first time since 2016.
Ahead of schedule or according to plan.
The chief economist of Gazprombank Sergey Konygin believes that the Bank of Russia may urgently raise its key rate. “If the Central Bank raises the rate, it will not postpone it until the next meeting at a rate of 75-80 rubles/dollar. Tomorrow, if the Russian markets open with mass sales, and the ruble begins to weaken strongly, the Central Bank will most likely use the key rate mechanism. Today in a press release it was said that the regulator is ready to consider further measures of monetary policy, and the tools for this are not so large. Thus, we can expect an emergency growth of the key rate by 0.5-1 p.p.”, believes Sergey Konygin, chief economist at Gazprombank.
According to the head of the State Duma Committee on Financial Markets Anatoly Aksakov, the regulator may decide to raise the key rate if the situation in the markets does not stabilize in the near future. “I think that the Central Bank will now observe the situation, how long this phenomenon will be. It is quite possible that if the oil price stays at these [low levels], there will be an increase in the key rate”, Aksakov said. At the same time, the deputy does not expect the situation of 2014 to happen again. On December 16, 2014, following a decision by the Central Bank of the Russian Federation to urgently increase the key rate from 10.5 to 17% per annum, an absolute exchange rate record was set at exchange trading: more than 80 rubles per dollar and 100 rubles per euro. At the same time, some experts believe that so far there is no reason to urgently raise the key rate. “I think that in this situation there will be no early meeting to raise the key rate. Most likely, everything will remain as it is. So far, the situation, let's say, is not critical from the point of view of the regulator, in my opinion. The falling oil price is offset by a weakening ruble”, says Sergey Drozdov, Finam analyst.
In his opinion, “a rate increase occurs if there is a trend reversal in monetary policy, or if it is a matter of some urgent measures to maintain the national currency and weaken the speculative attack on it. “We do not yet consider raising the key interest rate, because the general global trend is now lowering the key rate, including in developing countries”, he said.
According to Sberbank chief economist Anton Struchenevsky, panic has developed in the markets, which is based more on emotions than on real calculations. “The situation is extremely uncertain. I would call the first reaction of the market emotional rather than based on real calculations. It is possible that in the coming days, oil will win back partly lost positions”, he said.
According to Anton Tabakha, the chief economist at Expert RA, a short-term reaction to the movement of the oil market is absolutely natural. “Panic has taken over the markets in the last few days, today the market has been ripped off”. The last time such a sharp drop in oil was 30 years ago. Sharp drops in oil, although extended over several days, were not so long ago, in the winter of 2014-2015 and in 2008-2009. It is clear that after sharp falls, if this is not a controlled devaluation, a certain recovery can be expected. Because it is more a nervous reaction of the market than a reflection of fundamental reasons”, he said.
The Bank of Russia at the first meeting of the board of directors this year – on February 7, lowered its key rate for the sixth time in a row - by 0.25 percentage points (pp), to 6% per annum amid declining faster than inflation forecasts.
Market situation and Central Bank measures
The ruble fell sharply against the US and European currencies amid a severe collapse in oil prices after the failure of negotiations to reduce oil production in Vienna. Thus, the dollar on the international Forex market grew by 9.5%, and exceeded the mark of 75 rubles. The euro exchange rate rose above 85 rubles. Both foreign currencies were at this level for the last time in 2016.
Market situation and Central Bank measures
At the same time, the cost of futures for Brent crude oil for delivery in May 2020 during trading on the ICE exchange in London at the peak decreased by more than 40% to $31.02 per barrel. Later, Brent began to win back positions, now it is trading at around $37 per barrel. The cost of the April WTI oil futures was losing almost 50% and was trading at $27.59 per barrel. Later, WTI also recouped the losses a bit and returned to the level of $33 per barrel (-20%).
Oil is falling amid news that OPEC+ countries, following the results of negotiations in Vienna, could not agree on an additional reduction in oil production amid falling demand due to coronavirus COVID-19. OPEC proposed to further reduce production by 1.5 million barrels per day until the end of this year. However, Russia and Kazakhstan opposed this proposal.
Amid the weakening ruble, the Bank of Russia announced a decision to suspend the purchase of foreign currency in the domestic market to implement the budget rule mechanism for 30 days. The decision to resume operations with foreign currency will be made on the situation in the financial market during March of this year.
The press service of the regulator emphasized that the Central Bank of the Russian Federation monitors the situation in the financial market and is ready to use additional tools to maintain stability in the financial markets.
In accordance with the budget rule, the Ministry of Finance buys a monthly currency for additional income from the sale of oil at a higher price than a certain level; the Ministry of Finance sends this currency to reserves. The Central Bank of the Russian Federation acts as an agent of the Ministry of Finance for procurement in the open market.
At the same time, the Ministry of Finance also announced its readiness to reduce borrowing so as not to exert additional pressure on the market in conditions of high volatility. Decisions on holding auctions for the placement of federal loan bonds (OFZ) will be made taking into account market conditions to facilitate the process of stabilizing the market situation.