The Bank of Russia should raise its key rate

Against the background of new record oil prices and data on the U.S. labor market, the dollar fell below 73 rubles, and the euro has consolidated below 89. The Central Bank of Russia will hold a meeting on June 11. While analysts and economists expect Nabiullina to make smooth and cautious steps, participants of the interbank market are betting on a sharp and aggressive increase in the key rate. As noted by Bloomberg, in the quotation of forward agreements and interest rate swaps, the growth of the Central Bank rate to 6.5% per annum by the end of the year against 5% now.

Will the Bank of Russia increase its rate at the June meeting and how will it affect the ruble exchange rate? Andrei Vernikov, head of the Investment Analysis and Training Department at UNIVER Capital IG, answered Fortrader magazine's question.

- The chance that the Central Bank will raise its key rate by 0.25 p.p. is about 50%, and another 50% that it will raise it by 0.5% p.p. After the head of the Central Bank said at SPIEF-2021 that "the increased inflation in Russia is becoming steady" and "we need steady economic growth, sustainably low", the Central Bank in principle can not leave the rate unchanged.

For the money market an increase in the key rate by 0.5% p.p. will be a good thing, because further the Bank of Russia will take a pause in tightening monetary policy. And an increase by 0.25% p.p. solves nothing - the market will remain in a "suspended" state.

An increase of 0.25% would have no effect. An increase by 0.5% will lead to a strengthening of the ruble by about 1%. But it should be borne in mind that the movement of the ruble will be short-term. For the money market now much more important meeting of Putin and Biden on June 16, and its outcome is difficult to calculate.