Does a citizen need to know what a key rate is?

The Central Bank at its meeting on March 22 left the key rate at 16% per annum. Meanwhile, according to a survey by the NAFI Analytical Center, only just over a third (37%) of Russians understand the meaning of this financial term. Invest-Foresight asked Boris Kheifets to reveal the essence of this term.

Boris Kheifets, Chief Research Fellow at the Institute of Economics of the Russian Academy of Sciences

— So, Boris Aronovich, what is the key rate that the Central Bank determines?

— In simple words, the key rate is the interest at which the Central Bank lends money to Russian commercial banks.

What kind of money circulation system do we have? The main financial regulator is the Central Bank. He has money and lends it to banks, which later also lend it to enterprises and citizens. Of course, the Central Bank gives money at a certain percentage, not for free. Yes, there are free loans, but still the bulk of the money goes to credit organizations and further — at a percentage, which is fixed by the key rate.

— Is the key rate also present in other countries?

— Of course it is. The Federal Reserve rate in the United States is now at 5.25-5.5%.

— Serious difference… What does it depend on?

— Yes, the difference is significant. It depends on a number of macroeconomic indicators and, above all, on the level of inflation. And what does inflation come from? From the fact that there is a budget system in which revenues should be balanced with expenses, ideally. If incomes are less and expenses are more, then this difference must be financed. At the expense of money that needs to be printed. And ultimately this leads to inflation.

— Why has the key rate in Russia increased so seriously?

— Yes, until recently it was quite low. But today, as economists say, its value has definitely switched to two-digit.

First of all, this growth is due to the desire to curb inflation. Because many banks took currency at the same rate of 4-5% per annum, and the exchange rate grew much more seriously. And including in order to stop such transactions, the regulator raised the rate, making such operations unprofitable.

However, another problem arises…

— What problem?

— Not only citizens, or rather, not so much citizens are the main consumer of the Central Bank’s money. The main consumers are enterprises, private or public. It turns out that for them there is a problem of lending at a high interest rate. After all, 16% per annum for the key rate — commercial banks add their interest for services to them. And the enterprise turns out to be only the third stage for money, when the final loan rate for them reaches 24-25%.

— And who can take funds at such interest rate?

— At such rate, they can only give loans to industries with certain types of activities, where the income is much higher than these percentages. They are not numerous, it should be admitted, so many economists believe that we should try to reduce the key rate as much as possible.

By the way, during the overcoming of the crisis, primarily the 2008 crisis, all central banks, primarily the European Central Bank and the US Federal Reserve System (FRS), reduced their rates to almost zero.

We managed to get out of that crisis as a whole. Another thing is that a huge money supply has formed, which then turned into debt obligations of the state. And as a result, some consider today’s inflation to be one of the consequences of those low rates, that “zero rate” monetary policy.

— What can be the optimal level of the key rate and what does it depend on?

— It’s hard to say for sure. It depends on the state of the economy, budget, commensurability of incomes and expenses. For each country, these indicators are different.

Now there is a lot of information on the USA. And there are forecasts that they will finally begin to reduce the rate from 5.5% to 4.5%. However, so far, judging by the last meeting of the Fed, the achievement of these figures may be delayed in time. The fact is that they have curbed inflation, but they have not yet reached good levels of economic development and a good level of inflation there.

— What about us?

— Everything is quite tough for us today. The head of the Central Bank Elvira Nabiullina in her comments made it clear that the tough credit policy will continue. And it may even be long enough.

And at the same time, one must understand that this hinders economic growth and incomes of the population.

— If we are talking about citizens, then for them the rate, for example, today’s 16%, what does it mean? That interest on loans can not be below this level, and interest on deposits can not be above?

— Well, why not! Some banks take risks and offer the same deposits at 18% per annum. Although, of course, you are right, the bulk of credit institutions adhere to the rule that you mentioned with very minor adjustments.

— And in the end — does the average Russian need to know what it is?

— He must know! In general, you need to increase financial literacy. Because now, for example, there have been popular calls to open deposits while there are high rates. And such appeals should be treated with certain knowledge in your head.

The question is not only this, the question is to maintain the ruble exchange rate against the dollar, euro, and other world currencies. And here we must consider it much more seriously and thoughtfully, if, for example, we think about investing in deposits, in the same deposits in yuan.

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