Financial markets respond with composure to the reduction in central bank's key interest rate
In a move aimed at easing monetary conditions, the Central Bank of Russia reduced the key rate by 2 percentage points to 18% on Thursday. However, the overall economic outlook suggested a continued moderation in economic activity, causing a mixed sentiment among investors.
Elvira Nabullina, the Bank of Russia's head, emphasized a careful return to balanced growth with slower domestic demand in her speech. This cautious tone, along with the potential for prolonged high interest rates in the Russian economy, may have contributed to the decline in the IMOEX index, which dropped to 2772.39 points, 1.3% lower than Thursday's close.
Natalia Pyryeva, a leading analyst at investment company "Figura Broker", believes that this shift in the market reflects concerns about the slowing domestic demand and the cautious tone of the central bank. The IMOEX index remained within a narrow range of 2810-2820 points for most of Thursday and the first half of Friday, before dropping following Nabullina's speech.
Despite the decline, Pyryeva also stated that businesses will likely reduce or postpone their investment programs due to the high cost of money in the economy. She further added that interest rates will remain high for a sufficiently long time, continuing to put pressure on business.
Dmitry Babin, a fund market expert at "BCS World of Investments", stated that easing monetary conditions often weakens a national currency. In contrast, the ruble had already responded to expectations for the key rate change the previous day, and efforts to raise the dollar rate continued on Friday, reaching 80 rubles/$ before returning to the previous day's levels (79.4 rubles/$). The yuan remained within a range of 11.05-11.1 rubles/CNY for the past two days on the exchange market.
The stock market experienced an increase in sales due to Nabullina's speech, with Pyryeva suggesting that the market has shifted to more active decline due to the prevalence of pro-inflation risks over disinflation on the medium-term horizon.
In summary, the Central Bank of Russia cut the key rate due to declining inflation and slowing demand. Nabullina emphasized a careful return to balanced growth with slower demand, while Pyryeva sees the IMOEX index decline as a reaction to this cautious economic outlook, despite the key rate cut. This interpretation aligns with common market behavior where expectations of sustained or stronger growth are needed to boost stock indices after a rate cut; a cautious or uncertain outlook often tempers the positive effect of such monetary easing.
[1] Source: Natalia Pyryeva, leading analyst at investment company "Figura Broker".
Businesses may reduce or postpone their investment programs due to the high cost of money in the economy, according to Natalia Pyryeva, a leading analyst at investment company "Figura Broker". The decline in the IMOEX index could be a reaction to the cautious economic outlook, as stated by Pyryeva, despite the Central Bank of Russia cutting the key rate.
