Due to the “fuel shock”: The Central Bank of Russia may halt the reduction of its key rate
29 June 05:14
The long-awaited cut in the Central Bank’s key rate—which large businesses have been calling for for over a year— criticizing Elvira Nabiullina for “freezing” the economy, may be shelved indefinitely due to the growing fuel crisis, which threatens to deliver a new inflationary shock to the economy. This is reported by "Komersant Ukrainian", citing Russian propaganda media.
In the first three weeks of June, retail gasoline prices jumped by 3%—a record high in the 20 years of available statistics. And since the beginning of the year, price increases have reached nearly 10%, a level not seen at any point in the last 14 years.
“The crisis in the Russian fuel market is turning into a full-blown storm,” states economist Kirill Rodionov: In May, according to Rosstat, production of petroleum products fell by 13.5% (a record low for at least 12 years), and in June, the decline in gasoline output could have reached 25%. This calls into question further easing of monetary policy, according to analysts at Solid Investment Fund: “Accelerating inflation amid the fuel crisis makes this scenario less likely.” As of June 22, overall inflation in Russia, according to data from the Ministry of Economic Development, had accelerated to 5.9%, although it had remained around 5.3% in early May.
The rate of price growth has been rising for four consecutive weeks, and weekly inflation, on an annualized basis, has reached 10%, notes Andrey Khokhrin, CEO of Ivolga Capital. “This is hardly just a spike; it’s more likely the beginning of a trend,” he emphasizes, adding that the Central Bank “must not ignore the inflationary threat.”
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At its last meeting on June 19, the Central Bank cut the key rate by only 0.25 percentage points, to 14.25% per annum. Elvira Nabiullina warned that room for easing has narrowed due to fuel problems and the government’s plans to sharply increase budget spending.
“The 14.25% key rate may now turn out to be the new equilibrium level,” and maintaining it is now the “base case scenario,” according to Khokhrin.
Most economists continue to forecast a rate cut this year, albeit at a slower pace—to 13% by year-end instead of 12%. However, banks in the interbank market are already pricing in only one rate cut—to 14%—in their interest rate swap quotes, notes investment banker Yevgeny Kogan.
The government debt market is generally bracing for a Central Bank rate hike, not a cut, writes Alexei Tretyakov, founder of Aricapital.
Last week, government bond prices plummeted, and yields on long-term bonds jumped to nearly 16% with the Central Bank rate at 14.25%.
In the past, when such a large gap emerged, the central bank’s rate would “catch up” with yields in the government bond market, Tretyakov notes; moreover, this usually preceded a significant tightening of monetary policy—in 2014 (the rate was raised to 17%), 2022 (the rate was raised to 22%), and 2024 (the rate was raised to 21%).
Now, “only the naive” continue to believe in a key rate cut, while the market is “trying to price in” a scenario in which the Central Bank responds to the crisis with a sharp tightening, Tretyakov notes.
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