The Central Bank made a decision: the interest rate was raised again to 13% per year.
Photo: Mikhail FROLOV
This Friday the Central Bank made a difficult decision. The key rate was increased again to 13% annually. The head of the Central Bank explained this by the increase in inflation. They say price growth is accelerating. And it must be reduced before this process accelerates too much. How long will we have to live now with so much at stake? Will it be possible to strengthen the ruble? So what should depositors and borrowers do?
HARD POLITICS
13% annually is a lot and quite difficult. Of course, not 20%, as it was last spring. But it’s also decent. In addition, now the Central Bank does not plan to rush to lower the key interest rate. First you have to make sure that inflation has really started to slow down.
– We have updated the macroeconomic forecasts and, based on them, we are clarifying the level of the key interest rate necessary to achieve the inflation target of 4% by the end of next year. Under current conditions, returning to the target will require a long period of strict monetary policy,” explained Elvira Nabiullina during a press conference.
He did not specify which period he was referring to. It seems that in the next six months we will definitely live with a double-digit rate. Maybe more. This means that deposit rates will remain high and it will be possible to earn good returns from them. But borrowing money in the coming months will be expensive. Average rates on cash loans already exceed 21% annually. Market mortgages are already issued at 14-15% per year. Experts consider these interest rates for mortgage loans to be essentially prohibitive.
MANY MORTGAGES – MORE RISKS
It is true that the real estate market now lives mainly on steroids. The increase in prices is influenced by preferential mortgage programs. They heat up the market and prevent real estate prices from falling. For example, subsidized loans represent 90% of purchases in the primary market. But in the secondary chocolate market there are no such conditions.
– In fact, mortgages are growing at a rapid pace. If we take it in annual terms, as of September 1 the growth rate was around 30%. This worries us because it causes a gap in housing prices in the primary and secondary markets. It remains at a level of around 40%, Nabiullina explained.
In other words, after purchasing an apartment in a new building, you can sell it on the secondary market at a significant discount. This is because the difference in interest rates affects the monthly payment. And such disproportion creates risks of default. If the borrower cannot pay the bank, he may remain a debtor even if he sells the apartment.
SALE OF INCOME IN CURRENCY AND RUBLE RATE
In theory, an increase in the key exchange rate should also affect the ruble exchange rate. The higher the exchange rate, the higher the exchange rate of the national currency. But something in this mechanism seems to have broken. The ruble did not respond with growth to the actions of the Central Bank. On the contrary, it even began to weaken, once again exceeding 97 rubles per dollar.
Many experts offer other options for strengthening the ruble. But the head of the Central Bank believes that they are unlikely to be effective.
– The transfer of funds to a foreign bank does not in itself create a demand for currency. The demand arises at the moment this currency is purchased. You can only influence demand by increasing the attractiveness of the ruble as a store of value,” Nabiullina said.
And high interest rates on the same ruble deposits or bonds are just one of the incentives that can affect supply and demand in the foreign exchange market. At the same time, forcing the same exporters to sell foreign currency earnings within the country also makes no sense, said the head of the Central Bank.
– Once their foreign currency earnings have been sold, exporters can buy them back in the amounts they consider necessary. As a result, turnover on the foreign exchange market will increase, but the balance between supply and demand for currency will not change. This will not have a significant effect on the course,” Nabiullina explained.
In his opinion, putting unnecessary obstacles in the way of business now is counterproductive. Firstly, this will prevent them from parallel imports and import substitution. And this is important now. Secondly, they will continue to find loopholes to circumvent any restrictions, including monetary ones. But at the same time, they will include additional costs in the price of goods, which will only lead to a further acceleration of inflation.
TOTAL
Perhaps there is some truth in these arguments. But the increase in bank rates can hardly be considered positive for the economy. More expensive loans reduce incentives to expand production and can also lead to higher prices. The Central Bank’s forecast for inflation at the end of the year is 6 to 7%. Why in such conditions keep the key interest rate twice as high is a big question that remains unanswered.
The actions of the Central Bank seem doubly strange, given that the previous rate increases did not really affect the ruble exchange rate or inflation. That is, the damage to economic growth and development at a high rate will be 100%, but the probability of achieving the established objectives is unlikely.
So, it is a mystery why the Central Bank so stubbornly rejects other options to solve this problem, preferring only conservative methods. In much more nervous and unpredictable conditions last spring, the regulator managed to work as efficiently as possible. Now there is a feeling of indecision…
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