After the Central Bank’s key rate rises to 13%, deposits will become more profitable and loans will become more expensive
Photo: Mikhail FROLOV
The main event this week is the meeting of the Board of Directors of the Central Bank on monetary policy. The Central Bank was again deciding what to do with the key rate. Leave as is or increase. Analysts’ opinions before the meeting were roughly evenly divided. Those who predicted growth turned out to be right. The Central Bank raised the key rate from 12% to 13% annually.
DEPOSIT AND LOAN RATES WILL INCREASE
“Inflationary pressure in the Russian economy remains high. Important pro-inflationary risks have materialized: the growth of domestic demand, which exceeds the possibilities of expanding production, and the weakening of the ruble in the summer months. Under these conditions, it is necessary to ensure additional tightening of monetary conditions,” the Central Bank said in an official statement.
Much depends on the key rate. Both inflation and economic growth and, first of all, interest rates on deposits and loans in banks. How to find the right balance? And how will the Central Bank’s decision affect you and me?
To begin with, it would not hurt to remember how the interest rate really affects our economy. And does it have any effect? First of all, the activity of the consumer depends. The higher the rate, the more expensive the loans and the more profitable the deposits. People borrow less and keep more money in bank deposits. And therefore they spend less on goods and services. And if demand falls, prices don’t rise as quickly.
The same, vice versa. The lower the rate, the cheaper the loans will be and the easier it will be to borrow money to buy something. And if demand grows, prices rise.
We will soon see the consequences of the increase in key rates. In the coming days, banks will increase interest rates on deposits and loans by approximately the same 1%. And then price growth should slow down, at least that is what the Central Bank firmly hopes.
– The maximum deposit rates on the market reach 12 – 14%, but the average is still well below the current level of the key rate. This suggests that, despite the Bank of Russia’s tough signal on monetary policy until the end of this year, banks do not expect the current cycle of rate increases to last long, says Igor Alutin, managing director of the Financial Services project of the Moscow Stock Exchange.
AVOID AN INFLATIONARY SPIRAL
This year, the Central Bank expected inflation to remain in the range of 4.5 to 6.5% annually. But a too weak ruble led to an increase in import prices. And this was reflected in the general increase in prices. Since the beginning of the year, inflation has risen to 3.6%. The rate in August is about a quarter of a percentage point. But this is misleading. Normally, at the end of summer we witness deflation, that is, a drop in prices. And in autumn and especially in December there was a strong acceleration. Therefore, there is a risk that inflation will exceed the expected 6.5%.
It would seem that this is still very little. Last year, for example, inflation was double. And even in developed countries, prices grew at double-digit rates. But here the Central Bank is quite proactive. And it is trying to avoid the so-called “inflationary spiral”, that is, an uncontrolled increase in prices.
THREE REASONS FOR THE PRICE RISE
There are prerequisites for this. Demand has grown rapidly in recent months. Both for real estate and consumer durables. And the products have increased in price. One of the reasons is the transition of savings behavior to those purchases that were previously postponed. The imbalance between supply and demand leads to an increase in inflation.
Plus, there’s a lot of money in the economy. The money supply has grown by 24% over the past year, up to 91 trillion rubles. The government injected money into the economy, which stimulated demand in priority sectors that are most important to the country. But now is the time to turn off the tap, otherwise overheating will occur. And a new increase in prices.
Another factor that affects prices is the ruble exchange rate. The proportion of imported products in our stores remains high. And the lower the exchange rate of our currency, the more expensive foreign products are. Since the beginning of the year, the ruble has weakened by about a quarter. And this accelerated the rate of inflation.
And finally, the gasoline also began to accelerate. Since the beginning of the year, fuel prices have increased by 8.5%. And the prices of almost all goods depend in one way or another on the cost of fuel. If transportation becomes more expensive, everything else becomes more expensive.
The Central Bank’s goal is to bring the inflation rate to 4% next year. Therefore, now the Central Bank is actively slowing down. Whether this is correct or not, we will see very soon. But one thing is clear: it is impossible to influence either the ruble exchange rate or the growth of inflation simply by increasing the key exchange rate. Comprehensive decisions must be made (for example, the introduction of monetary restrictions), which also fall within the competence of the government.
ONLY NUMBERS
What are the rates in banks for different products, according to the Central Bank and Financial Services?
Deposits 10.5%*
Cash loans 22%
Mortgage 14%
*This is on average. Bank securities are highly term dependent. The smaller it is, the higher the rate.
