The Central Bank lowered the rate. What does this mean for the economy, loans and the ruble exchange rate

The Bank of RUSSIA lowered the key rate from 14% to 11%. The Central Bank admitted that it could continue to reduce it further. We will tell you why the regulator cuts the rate and how it will affect deposits, loans,

 - this is the minimum percentage at which the Bank of Russia issues loans to commercial banks and accepts money from them for deposits. Having received a loan from the Central Bank, banks give loans to companies and retail consumers already at their own interest, which is slightly higher than the Central Bank's interest.

Since May 27, 2022, the key rate   has decreased by 300 basis points - from 14% to 11%.

The rate change occurred for the fifth time since the beginning of 2022:

February 11 increased from 8.5% to 9.5%; February 28 — from 9.5% to 20%; On April 11, it was lowered from 20% to 17%; April 29 — from 17% to 14%; May 26 — from 14% to 11%.

Change in the key rate of the Central Bank of Russia October 14, 2013 - May 27, 2022 (Photo: RBC)

Since the end of July 2020, the key rate has been at a historic low of 4.25% and has remained at this level until March 2021. Since March 17, 2021, the Central Bank has raised the rate at every meeting. In total, it increased by 4.7 times. Since February 28, 2022, the rate has been a record 20%. The historical high lasted at this level for more than a month.

The Central Bank admits the possibility of continuing to reduce the key rate at the next meetings, according to a press release on the rate. Much will depend on inflationary data and how external conditions change.

What is the key rate and how it affects our lives Key rate , Central Bank , Banking and finance

Why the Central Bank of the Russian Federation lowers the key rate

The key rate is one of the tools that allows the Central Bank to influence the country's economy. The main task of the regulator is to find a balance between all market participants and all processes - inflation, economic activity and financial stability.

First of all, the goal of lowering the rate is to fill the country's economy with cheap money, which allows the development of production, increase the tax deductions of companies, the state to spend more on large-scale projects, and so on.

The easing of monetary policy suggests that the growth in the purchasing power of the population will increase. Citizens will stop saving and cut spending and start spending, which will allow the economy to develop. But this measure can also cause inflation to accelerate:

Photo: Shutterstock

Since November 2014, the inflation target is 4%. Since then, he has not changed. There is no specific rate of inflation. For each country, a comfortable level of inflation is considered at which economic growth continues, rather than slows down, and at the same time the unemployment rate remains low.

What is inflation and how to protect your income from it Inflation , Hedging , Bonds , Real estate , Stocks

As of May 20, 2022, annual inflation in Russia as a whole is 17.51%. For the week from May 14 to May 20, prices fell by -0.02%. “The price reduction is taking place against the background of the strengthening of the ruble exchange rate and is recorded for the first time since August 16, 2021,” the Ministry of Economic Development noted.

The sharp increase in the rate, which took place in February from 9.5% to 20%, was due to the need to slow down inflation, as well as to restore the desire of citizens to accumulate funds. Due to new tough sanctions in February-March, there was a massive outflow of cash from banks - by March 3, the liquidity deficit of the banking sector exceeded ₽7.03 trillion. After raising the key rate to 20%, interest on bank deposits rose to 25%, which returned the population's desire to save on deposits - the structural liquidity surplus of   the banking sector for operations with the Central Bank at the beginning of the day on May 25 amounted to ₽1.9 trillion, according to the Bank of Russia.

In April, the Bank of Russia considered it possible to move on to lowering the key rate, although it noted in the May report on monetary policy that inflation in 2022 would be 18-23%.

The current forecast range of the Central Bank for the average key rate for 2022 is 12.5-14%, for the next one - 9-11% and for 2024 - 6-8%.

The rate cut since May 27 was explained by the Central Bank by the need to restore lending, and with it economic activity. At the same time, the regulator notes that the easing of monetary policy was made possible by reducing risks to financial stability.

All about bank deposits: rates, taxes, how to calculate profit Deposit, Contribution, Banking and finance, Profitability

Photo: Shutterstock

Consequences of reducing the key rate by the Central Bank What will happen to loans and mortgages

A change in the key rate directly affects the rates in banks. When the key rate decreases, the interest on banking products also decreases.

“The response time of banks to changes in the key rate depends on the step and can range from one day to a month. With sharp changes in the rate, the reaction is faster. Banks are forced to quickly adapt to changing market conditions,” said Dmitry Monastyrshin, chief analyst at PSB.

Igor Alutin, Managing DIRECTOR of the Finuslugi project of the Moscow Exchange, noted that the average rate on consumer loans in the top 20 banks as of May 25 was 24.52% per annum. “After the reduction of the key rate, we can expect a decrease in interest rates on loans, although the dynamics will be smoother than on deposits,” he said.

Read also: Penalties and penalties for late payments are untied from the current key rate of the Central Bank

What will happen to interest on deposits

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Changes in the key rate also affect the interest on deposits in commercial banks. If it decreases, then interest on deposits also decreases.

According to Alutin, banks consistently win back the dynamics of the key rate. According to the Profitability Index of Finuslug deposits, market rates on deposits for a period of three months to a year have decreased by 1.2-3.24 percentage points since the April cut in the key rate. Alutin added that now the rates are 11.54-9.64% per annum.

“The current decline marks the strengthening of this trend, we can expect minus 2-3 p.p. on short-term deposits until the next meeting on June 10,” he said. According to him, the decline in long-term deposits will be less pronounced.

On April 8, the Central Bank unscheduledly lowered the key rate from 20% to 17% per annum. Following this, the pace of declining rates on bank deposits accelerated. According to the Deposit Profitability Index, from April 6 to April 12, the average rate on deposits for three months in the top 50 banks decreased by 2.23 percentage points, and for six months - by 1.73 percentage points. For long-term deposits, the rates were already based on expectations of a reduction in the key rate, so there was no sharp decline, noted at Finuslugakh.

Then the rate of falling interest on deposits slowed down. According to the data from April 19 to 26, the decrease in deposit profitability indices amounted to 0.2–0.5 percentage points. However, at the end of April, the Central Bank again reduced the key rate - from 17% to 14%. Following it, banks also began to reduce interest rates, but the reduction was not as significant as after the unscheduled rate cut in early April. Banks have included a possible decrease in interest on deposits in advance.

In the week from May 17 to May 24, before the extraordinary meeting of the Central Bank, the decrease in deposit rates accelerated again on the market, this is also facilitated by the strengthening of the ruble and the May slowdown in inflation, they said at Finuslugakh. The decrease in deposit yield indices in the top 50 banks amounted to 0.11-0.56 percentage points, however, most large banks left deposit rates unchanged. According to Finuslug, they fixed in the range of 10-12%. Basically, the rates were reduced by smaller banks, trying to keep them at a competitive level, the project noted.

The chief analyst at PSB noted that rates on deposits are changing faster than on loans. According to Alutin, banks are trying to keep such a level of interest on deposits:

large banks - the key rate is approximately -1–1.5 percentage points;

small banks — key +0.5–1 p.p.

Alutin noted that the largest decrease can be predicted for deposits for three months, and for longer ones it will be less noticeable.

What will happen to the ruble

Usually, if the Bank of Russia softens monetary policy, for example, reduces the key rate, then this weakens the position of the ruble, said Mikhail Zeltser, an expert on the stock market at BCS Mir Investments.

Reducing rates creates conditions for the weakening of the national currency in an open financial system. However, since the end of February, taking into account the imposition of sanctions and internal measures to control the movement of capital, this system in Russia has actually ceased to be open, said Sofya Donets and Andrey Melashchenko, economists for Russia and the CIS at Renaissance Capital.

“The currency market is driven primarily by trade flows, that is, news, expectations now do not have the same impact on the exchange rate as the change in the Central Bank rate. The market has become much more volatile, trading volumes are smaller,” the economists said.

On the other hand, the rate continues to influence consumption and savings. “But the scale and speed of the transfer of the rate movement to the ruble exchange rate will certainly be significantly less than before,” the experts noted.

The chief strategist of Aton, Alexander Kudrin, also believes that the impact of the rate cut on the exchange rate will be limited, as a large imbalance between the supply and demand of the currency will remain, primarily due to problems with imports, and capital restrictions continue to apply.

Zeltser, on the contrary, noted that with the rate cut, the ruble loses the fortress factor from the Central Bank. In addition, market players can also react to changes in the key rate and inflation data. In particular, on May 25, the DOLLAR exchange rate against the ruble at the moment fell below ₽56, but by the end of trading it was able to actually fully win back the decline of the last two days, said Yegor Zhilnikov, chief analyst at the Economic and Industry Analysis Department of PSB. “According to our estimates, this behavior of the currency pair is associated with the activation of large players before an unscheduled meeting of the Central Bank,” the expert said.

In particular, on May 26, after the announcement of a new rate cut to 11%, the dollar and the euro went up by 3-5%. Aleksey Antonov, HEAD of the investment advisory department at Alor Broker, noted that the rate cut would provide moral support to ruble bears who would try to weaken the ruble.

The Bank of Russia unexpectedly cut its key rate to 14% per annum Key rate , Central Bank , Banking and finance , Ruble

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A term that refers to the likelihood of an asset being sold quickly at or near the market price. Read more The main instrument of the country's central bank's monetary policy. This is the interest rate that determines the minimum value of money in the country, affects the rates of loans, deposits, the size of the coupon of traded bonds. The Central Bank influences inflation and exchange rates by changing the key rate. For example, if the key rate rises, then loans and deposits become more expensive, and inflation is contained.