25 or nothing: recent central bank actions

The global economy went through another round of central bank policy meetings. The US Federal Reserve (Fed) expectedly hiked its policy rate by 25bp to 1.5-1.75%, the European Central Bank (ECB) and the Bank of England (BoE) stayed on hold, while the Bank of Russia (CBR) cut its key rate, also by 25bp, to 7.25%.

Notwithstanding mixed actions, all three global banks issued hawkish comments. The Fed justified this by strong growth, rising employment and above-target inflation. Also, lower taxes would provide an additional positive growth momentum in the near term. As a result, the Fed indicated more aggressive tightening ahead, with a total of four 25bp rate hikes expected this year, one more than indicated earlier.

US GDP growth, inflation and Fed rate, %

US GDP growth, inflation and Fed rate, %

Source: Oxford Economics, Fed Reserve

The BoE warned of forthcoming rate hikes, even though consumer inflation had eased to 2.7% YoY in February, below the critical 3% threshold. In its attempts to bring inflation towards the 2% target, the BoE would likely resume rate hikes as early as in May, particularly if inflation returns above 3%.

The ECB remained the least hawkish of the three Western regulators. It reiterated no intention to raise interest rates until the end of the QE programme and stated that later the rates would be lifted at a predictable and measured pace. However, it dropped the commitment to boost the quantitative easing programme in case the Eurozone growth slows (“its easing bias”), thus incorporating strong Eurozone growth.

Eurozone GDP growth, inflation and ECB rate, %

Eurozone GDP growth, inflation and ECB rate, %

Source: Oxford Economics

While expectedly easing policy at both meetings this year, the CBR defined – and shortened – the timeline of policy rate normalisation. The target was set to complete the process this year, implying that the key rate would reach 6.0-6.5% by December, and stay flat for a while after that. Where exactly the “neutral” level would be set would likely be determined by inflation in H2 2018. The main reason for more aggressive rate cuts was inflation, which the CBR now expects to finish this year at 3-4% YoY and stay around 4% in 2019. The CBR also raised its oil and GDP growth forecasts today; the latter to 1.5-2.0% in 2018.

Russia GDP growth, inflation and CBR rate, %

Russia GDP growth, inflation and CBR rate, %

Source: Rosstat, CBR


The main implication of recent central bank actions and comments is rising interest rates in the West and declining in Russia. While a premia will likely remain in Russia rates, it will continue to subside. This will reduce the (relative) attractiveness of local debt instruments. This also implies weakening rouble support from incoming foreign capital inflows. Nevertheless, the currency projections show USD/RUB trading flat around 57 in the coming months.

For the Russia real estate sector, the combination of low inflation and declining interest rates continues to provide a background for further recovery. Lower interest rates also indicate declining yields in the near future.

About the Author

Vladimir is a recognized expert with over 20 years of experience in research in macroeconomics, capital markets, investment, and real estate. Vladimir has joined JLL in April 2016, where he has held the Head of Research position in 2007-2010, before leaving to take up the role of Chief Economist, Russia & CIS at Barclays Capital. Most recently, Vladimir worked at Sberbank CIB as Senior Strategist. From 2003-2005 he has led the Research department at Rosbank and then was a Chief Economist at Renaissance Capital. Vladimir has received several prestigious awards and nominations. He has been voted the best economist in the Institutional Investor All Russia Research Team survey, the ‘Best Russian Real Estate Analyst’ by the Euromoney Real Estate Awards, and has been a member of the top-ranked research teams in Eleonora Surveys. He holds a BA in Mathematical Economics from Moscow State University, a MA in International and Development Economics from Yale University and a PhD in Economics from Duke University.

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