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A difficult choice for the Central Bank: will the regulator lower the key interest rate?

A difficult choice for the Central Bank: will the regulator lower the key interest rate?

Regulators of several countries at once lowered the refinancing rate over the past week in order to mitigate the impact of the coronavirus pandemic on the economy. Thus, the US Federal Reserve System reduced the indicator to 0-0.25%, the Central Bank of South Korea — to 0.75%, the Bank of Japan lowered its key rate to minus 0.1%. The Central Bank of China, in turn, left the rate at the same level, which is 3.15%, but announced support for the economy in the amount of 100 billion yuan, according to Forbes.

According to analysts from Bloomberg, the Central Bank of Russia will leave the key figure unchanged at 6%. Many analysts take the same view. Oleg Shibanov, head of the Skolkovo-NES Center for the Study of Financial Technologies and Digital Economy, is confident that at the moment the rate should not be changed, since the market has not yet recovered from the shock after the fall in demand. In this situation, it is not clear whether changing the rate will help. It might be worth trying to increase government spending or revise tax policy.

Last time, the regulator reduced the indicator in February this year, but the fall in world markets may trigger the Central Bank to raise the rate, said Denis Poryvai, an analyst at Raiffeisenbank.

VTB CEO Andrey Kostin also spoke about a possible rate hike. In an interview, he called the rate increase a logical, albeit radical, decision. He is confident that it is possible to avoid the indicator’s growth if the spread of coronavirus stops by the summer.

On March 16 analysts at VTB Capital published a note in which they argue that on March 20 the regulator will face a difficult question about the construction of monetary policy in the future. Expectations of higher inflation over the next year are justified.

According to experts, the situation in which the regulator finds itself is similar to that in which Jean-Claude Trichet found himself in 2008. During that period, the ECB raised the refinancing rate by 0.25% to 4.25% to avoid an inflation increase. This decision is still questioned by many analysts.

Perhaps Russian Central Bank will face the same issue. At the moment, the inflation rate is much lower than the planned 4%, and due to the collapse of the ruble, it may be within 4.5-5%.

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