How the Central Bank's rate cut will affect financial instruments. Analysis

The Central Bank of Russia will hold a meeting on September 12, at which it will determine the level of the key rate. Against the background of steady deflation, the regulator may continue to decline from the current 18%. This will lead to a drop in deposit rates, but the stock market will remain stable. How the Central Bank's decision will affect the profitability of financial instruments is described in the Izvestia article.

Will the Central Bank lower the rate

• The dynamics of inflation for the period from July 16 to August 18 to some extent allows us to raise the issue of lowering the key rate. According to Rosstat, during this period, the consumer price index decreased by 0.35%, so that the current annual inflation slowed to 8.5%. From August 26 to September 1, deflation was another 0.08%. However, it should be taken into account that the period from July to September is a traditional time for it. At this time, lower prices for fruit and vegetable products, which are being released to the market, have a noticeable effect on inflation.

• Experts are more inclined to believe that the current rate of deflation is quite modest and does not yet indicate a reversal of inflationary processes. The central bank is inclined to pursue a tight monetary policy and will take this factor into account in order to maintain the key interest rate. The fact that food prices seasonally move away from pressure does not play a significant role for him.

• The Central Bank invariably calls confidence in a steady decline in inflationary processes a condition for a stable rate cut, while it does not possess a tool for inflation compression. The tight monetary policy of the Central Bank has only allowed to reduce inflation from 10.5% to just under 9%, which does not meet the request of either enterprises, the population, or the Central Bank itself, which aims to lower inflation to 4%.

• Reducing the key interest rate is critically necessary for business. Moreover, he will be satisfied not with a symbolic loss of 1-2 percentage points, but with a radical decrease to at least 8%. Within this level of borrowed funds, the economy develops most efficiently. However, an instant drop to 8% leads to a sharp spike in inflation and cancels all efforts to curb it. Even if the Central Bank concludes that inflation has moved to a steady decline, it will lower the rate smoothly and spend at least a year lowering it to a value acceptable to businesses.

Which instruments are affected by the bid

• The Central Bank's rate affects all financial instruments to one degree or another, but in each case the effect of the next decision of the board of directors may be different. Deposits are the most sensitive to the regulator's decisions. A reduction in the key rate usually leads to a reduction in deposit rates very quickly. Banks pay interest from their profits, and lowering the key interest rate is a signal that it may decrease in the future.

• As for the bond market, there may be some recovery in the event of a rate cut of at least 1 percentage point. At the moment, this instrument is losing competition to deposits, which are held high by the Central Bank's rate. However, a drop in deposits will lead to some capital flow into debt securities, in particular into federal loan bonds (OFZ). All other things being equal, they become more attractive than deposits due to their long-term nature.

Seasonal discount: why deflation in Russia will not stop

The price increase stopped for five weeks

• However, in the medium term, bonds will also lose their attractiveness in the event of a reduction in the Central Bank's rate. This year, the yield of OFS has gradually decreased following the movements of the key rate, albeit not as sharply as deposits. In the corporate bond sector, yields remain slightly higher than in OFZ, but they also tend to follow the decisions of the Central Bank.

• If the rate is lowered, the reaction of the markets will be more restrained than optimistic. It is most likely that the Central Bank will limit itself to lowering the key rate by 1 percentage point. For investors and entrepreneurs, this will not have a significant impact on economic activity, and therefore noticeable movements in the stock market should not be expected. The only exception is the banking sector, which, even with a minimal reduction in the key rate, will be able to lower rates on deposits and loans.

• In addition, the last time the Central Bank of the Russian Federation sent a signal that it does not intend to move to the active phase of rate cuts. Analysts are more likely to expect a repeat of this signal, which will mean that the rate will no longer go down. Investors are interested not so much in the current rate level, but in confidence in its further reduction over a long period. Only in this case, the stock market will be able to recover.

When writing the material, Izvestia interviewed:

• Mikhail Belyaev, an expert at the Russian Institute for Strategic Studies, PhD in Economics;
• Andrey Kochetkov, a private investment consultant.