The Central Bank may increase the key rate due to trade wars

Expectations for global economic growth this year have significantly worsened amid increased US import duties and China's retaliatory measures. The scale and speed of the negative impact that trade barriers are having on the global economy have exceeded the regulator's expectations. This is stated in the Central Bank's commentary to the medium-term forecast. Negative conditions for foreign trade may increase price growth within Russia, and against this background, a further increase in the key rate cannot be ruled out.

The Central Bank may begin to reduce the key rate as early as July. This opinion was expressed by the Chairman of the State Duma Committee on Financial Markets, Anatoly Aksakov. He added that the initial reduction may be very small, by 0.25%. It is curious that the parliamentarian expressed his opinion almost immediately after the publication of the Central Bank of the Russian Federation's summary of the key rate and forecast, where the regulator directly states that the consequences of the tariff wars between the US and China for the global economy turned out to be more extensive than it expected. They have increased uncertainty in foreign trade and may have a negative impact on inflation rates both globally and within the country.

In its summary of the key rate, the regulator also indicated that pro-inflationary factors still prevail over disinflationary ones. And this could lead to a tightening of monetary policy, which the Central Bank does not forget to remind market participants about. So why do the opinions heard "from high tribunes" differ so much?

Even experts do not have a single point of view on what to expect from the regulator in the summer. “An increase in the key rate in Russia is possible if, as a result of the escalation of trade wars, foreign manufacturers are forced to increase the selling prices of their products, increasing the cost of imports and, as a result, inflation expectations within the Russian economy,” says Spartak Sobolev, head of the investment strategy research department at Alfa-Forex.

However, according to him, it is unlikely that the key rate will be raised at the Central Bank meeting in June, given that it is almost twice as high as the official inflation rate. According to Rosstat, by May 5 this figure had slowed to 10.21% from 10.34% recorded on April 28. The regulator will tighten the monetary policy only if absolutely necessary: ​​a sharp surge in inflation risks, which so far seem to be fully balanced due to a gradual reduction in consumption and credit activity of the population, the expert explained.

According to Anastasia Naisheva, a specialist in the analytical research department at AVI Capital, the slowdown in the global economy and trade due to duties could cause a deep and long-term decline in demand for base metals and energy resources. A fall in prices, at least during the first period of the shock, would in such a situation lead to a double blow to the income of companies and the budget.

"Nevertheless, we are now clearly moving from a period of extreme concerns to a period of some optimism: the first firm trade agreements are already being concluded, some duties are being postponed, some are being reduced, a serious breakthrough in the negotiating track between China and the US," Naisheva noted. "All this improves both the situation and the external background, so we would more likely expect a rate cut than an increase. In the baseline scenario, if the inflation dynamics or the negotiating track worsens, we expect the rate to remain the same."

The high key rate set by the regulator has proven its efficiency. "We believe that if no "black swans" in the form of external negativity from global markets or from the geopolitical sphere "fly" to Russian financial markets or the real sector of the economy, then the Central Bank may first lower the key rate in June by 1-1.5% to 19.5-20% per annum," noted Natalia Milchakova, leading analyst at Freedom Finance Glabal. "But this option seems less realistic to us than maintaining the key rate at the current level, since the main factor that influences both the financial and real sectors of the Russian Federation today is geopolitics. And since the risks of external negativity are still high, and the situation itself has become more uncertain due to Trump's tariffs, then a change in the trend from slowing inflation to the opposite is still relevant."

If the Central Bank of the Russian Federation adheres to a cautious policy, and the Board of Directors does not want to change everything abruptly, the key rate will be kept at the current level in June. If there is a significant slowdown in inflation or, perhaps, significant shifts in the geopolitical settlement, then the most likely scenario for the development of events will not be an increase at all, but, on the contrary, a decrease in the key rate, Milchakova concluded.