The Central Bank maintained the key interest rate at 16% annually.
Photo: REUTERS
This Friday a meeting of the Board of Directors of the Central Bank on monetary policy was held. The Central Bank once again decided on the key interest rate. The fork was this: lower it, raise it or leave it unchanged.
Before the results were announced, most analysts predicted that there would be a third option. And so it happened. Why does the Central Bank keep rates high? How does this affect economic growth? And what to expect next?
To begin with, let me remind you that deposit and lending rates depend on the key rate. So our financial life depends on Neglinnaya’s decision. This is how the key rate has changed in recent years.
On February 22, it shot up to 20% and then started to fall quite quickly. In six months it fell to 7.5% annually. And he was at this level for a long time. But last summer it started to rise again. It grew to 16% in December. And here it was solved.
The reason is the growing inflationary spiral. Prices began to rise rapidly last year. There were several reasons. This includes a sharp rise in the dollar exchange rate, large budget expenditures and an increase in consumer loans.
As a result, an imbalance arose between supply and demand. Consumers wanted to buy more than sellers could offer them. They quickly realized that demand was high and prices could rise.
At the same time, there are now objective difficulties with supply. We cannot produce domestically in such volumes and importation is difficult due to logistical barriers and sanctions. This means that to eliminate the imbalance, the Central Bank decided to suppress demand.
A simple example. When deposit rates are high (above expected inflation), people try to save more. Because they hope to increase the purchasing power of their savings in the future. And high interest rates discourage potential borrowers. That is, they also spend less.
As a result, demand in the economy is not growing as quickly and balance with supply is gradually being restored. And this stops inflation. That’s the theory. And, in fact, this is what we are now testing in practice.
Typically, an increase in the key rate affects inflation with a slight delay, at least several months. And we can definitely say that this already happened in March. In January prices rose 0.86%. In February, 0.68%. And from March 1 to 18, only 0.11%.
It would seem that this is an excellent reason to reduce the rate. At least by a couple of percentage points. But the Central Bank decided not to rush. There are two arguments for this. Firstly, because a sharp slowdown in March can only be a one-off factor. Secondly, because the Central Bank does not consider the reference interest rate to be as bad as various alarmists often describe it. They usually come out with slogans. They say that expensive loans, on the contrary, only accelerate inflation. After all, merchants supposedly pass on all additional costs to buyers.
Do not move! When demand is suppressed by the same high tariffs, there is simply no one to pass on the increased costs to. Nobody will buy at high prices. This means that sellers’ appetite is decreasing.
In general, low rates coupled with a lack of supply will only make things worse. You and I will not be able to buy more clothes or food. Everything will become more expensive. Rising prices will devalue both income and savings.
In reality, we see all this in the two most vibrant markets: real estate and automobiles. At first there was great demand, caused by all types of preferential mortgages. As a result, prices rose and housing availability decreased. The second is more or less the same. The shortage of new cars and the high demand in the context, among other things, of rising real estate prices, have caused the average price of a new car to double in three years.
That is why the Central Bank reasonably believes that it is necessary to bring inflation to the objective of 4% per year. And they want to do it before the end of the year. Sounds great. But the Central Bank has already done it. For example, in 2015, inflation was around 13%. And few people believed that it would be possible to lower it quickly. But the following year it fell to just over five percent. And in the following four years it fluctuated between 2.5 and 5% annually.
That is, it was a time of price stability. And even you and I at some point believed that our prices might not rise at all. The Central Bank wants to achieve approximately the same effect now.
What are the bank fees?
On deposits: from 12.8 to 14.7% annually (depending on the term)
For mortgage: 17.5% annually (excluding preferential programs)
For cash loans: 23% annually
According to the Central Bank.
