Russia’s macro: Hiking the key rate to brake consumption growth
As Russia’s GDP growth is expected to remain moderate in 2021, the question now is what will happen next with interest rates, as the CBR raised the key rate by 25 bps at the end of March and by 50 bps a month later and hinted it will keep raising it further. What the regulator will do on June 11 (the next BoD meeting) remains a question as y-o-y inflation already naturally decelerated in April to 5.5% from the previous month’s high 5.8%, i.e., ahead of the CBR’s actions. Inflation is likely to fluctuate around current levels for some time before coming down sharply in 4Q21 irrespective of the CBR actions. The higher key rate will inevitably translate into higher consumer lending rates. Corporate borrowing will be more expensive as well. In mid-2021, the average consumer lending rate may already reach 11% (up from the current 10% on average).
Economic growth is another variable that could be affected by the CBR policy. However, these effects might not be straightforward, either, as there is much influence on the money market coming from the Finance Ministry’s activity, such as FX purchases and domestic borrowing. In the theoretical case of around 1% m-o-m growth of total consumer credit, household debt servicing costs at some point could become equal to this debt’s monthly increase, implying no contribution to economic growth from consumer lending. To secure a visible expansion of consumer demand fueled by consumer loans, credit should grow by 1.4-1.9% m-o-m, which would mean a more dangerous growth of debt on an annual basis as the costs of debt servicing are too high.
* So far, there has been no liquidity shortage in 2021, and banks were willing to extend more credit to the economy – both to households and corporate sector.
* The average consumer lending rate decreased in 2020 but remained over 10% even though the CBR cut the key rate to 4.25% in 2020. On average, deposit rates declined in 2020 to well below 5% and remained relatively unchanged in 2021, irrespective of accelerated inflation. Hence banks enjoyed over 600 bps margin between deposit and lending rates in the household segment.
* Rough estimates show that amid the increased stock of credit and relatively stable lending rates, the total costs of consumer debt servicing steadily increased. Servicing of the around R22-23 trln debt at the average rate of over 10% would cost the household sector nearly R200 bln per month.
* The CBR policy of higher rates combined with the Minfin’s complex liquidity management operations seem not to be aimed so much at bringing inflation down, as in fact, creating extremely favorable conditions for banks at the expense of the rest of the economy. Moreover, keeping budget-subsidized car loans and mortgages in effect makes little sense if the CBR intends to reduce the rate of consumer credit growth. A better step would have been to eliminate those subsidies first, see the response from borrowers, and then consider what to do with the rates.
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