Boris Kheifets: Today’s key rate depends not only on the economy, but also on politics

On October 28, the Central Bank of Russia kept the key rate at 7.5%. Invest Foresight asked Boris Kheifets, Professor at the Russian Government’s Financial University, to explain what this means.

The key rate has remained flat at 7.5%, and this happened for the first time since March 2022. What does this mean?

— This means that inflation expectations in the Russian economy continue to be quite high. True, we all remember the Central Bank’s baseline forecast, where inflation should be back to 4% by 2024, but at the moment, in the current economic situation, this seems unlikely. The regulator is struggling to counter the inflationary influence of a variety of factors that affect the consumer price index. The fact that it kept the rate at 7.5% is a fairly clear signal for the market.

— Could you remind our readers what the Central Bank rate is, and how it affects the economy?

— The key rate is a guideline for banks and for their monetary policy, which determines the rate at which banks can borrow from the Central Bank. When this rate is low, banks start buying up foreign currency, which pushes the ruble exchange rate down due to the high market supply. The volume of lending to the economy also increases, and this promotes infrastructure projects and general growth.

What about households? How does the Central Bank rate affect each of us?

— It affects the size of loans that banks can provide to the population. I am mainly referring to consumer lending, because mortgage lending is a different story partially linked to subsidies. If the rate remains flat, the terms of loans remain unchanged, respectively, which gives people a sense of certain stability, so they can make their borrowing plans. Usually, to make a profit, a bank has to lend at an interest rate higher than the Central Bank rate.

— The rate also affects the interest on people’s deposits.

— Yes. The interest on deposits should not exceed the Central Bank rate, so I assume that we may see a certain stagnation in the growth of new bank deposits.

— What changes can we expect in the Central Bank’s key rate decision-making in the medium term? What will these changes depend on?

— Of course, we should always hope for the best. We will certainly be moving toward our ‘4% by 2024’ goal, but this is still unlikely to happen. True, the situation may improve in the future, but for that to happen, we would need to find some “Solomonic” solution in the current economic situation. In any case, it will not happen overnight.

At this point, the forecasts for the market vary greatly, but most of them are unfavorable.

Do you believe the regulator’s current policy for setting its key rate is appropriate to the situation?

— I can say that the Central Bank has been regulating the market very effectively, given the context. Actually, very few central banks have ever operated in such conditions. I do not rule out a swing in the opposite direction, I mean an increase in the key rate with the deterioration of external conditions. Moreover, today, the key rate is influenced not only by economic, but also by political factors, and the voice of politicians definitely needs to be heard and taken into account.

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