A high key rate threatens the Russian economy with collapse: risks identified

In Russia, 40% of citizens over 16 years of age have loans. The Central Bank of the Russian Federation announced this in its published review of retail lending trends based on the results of 2023. 50 million Russians have financial obligations to banks and microfinance organizations. It is obvious that compatriots are not afraid of high loan rates. Why the regulator’s double-digit key rate does not help slow down inflation and why this state of affairs is dangerous, Maxim Osadchiy, head of the analytical department of BKF Bank, told MK.

— The annual price increase by April 1 amounted to 7.62%, and a week earlier it was at the level of 7.61%, follows from the review of the Ministry of Economic Development “On the current price situation.” Inflation slowly but surely continues to creep up, despite the high key rate, which is more than twice as high as inflation. Why is this happening?

— To understand this issue, let us recall the widely accepted explanation for why an increase in the key rate should suppress price growth. The population reacts to the increase in rates by increasing the demand for deposits, and the influx of household funds into banks is increasing. Accordingly, people have less money to spend on purchases. However, the population is heterogeneous, there are rich and poor, and they react differently to rising rates. At the same time, the main influence on price changes is the consumption of the poor – for the simple reason that there are many more of them. Therefore, the influence of the rich on changes in demand due to rising rates can be neglected. Perhaps one rich man eats for ten poor people, but there are hundreds of times more poor people. In addition, foie gras, truffles and oysters are not included in the inflation calculation.

— Yes, and the financial behavior of the rich and the poor is different, isn’t it?

— Indeed, the rich predominantly save, forming the bulk of deposits, while the poor, for the most part, live on credit. It would seem that rising rates should ideally reduce the demand of the poor for loans and reduce their consumption. But we are not seeing anything like this, and retail loans and household demand for goods continue to grow.

– So what is the reason for this paradoxical phenomenon?

– And the casket opens simply. The population’s demand is largely financed by retail credit. According to Frank RG, the issuance of cash loans in February increased by 28% compared to January, car loans by 29%, mortgages by 17%, and the volume of loans provided to the population exceeded 1 trillion rubles. As we can see, active growth continues in this segment of the credit market, spurred by government subsidies of interest rates on mortgages and car loans. The direct price of housing is not included in the consumer basket used to calculate inflation. But the cash flows generated by the sale of housing go through the pockets of builders to the market. Same with a car loan.

— Last year, the Central Bank and the Ministry of Finance intensified the fight to cool the mortgage market. The down payment on preferential housing loans was increased, the rate increased and at the same time the requirements for borrowers were tightened. Did the measures not work?

– Why, these measures had an effect. The mortgage market is cooling. However, the population’s demand for loans has shifted from the mortgage market to the car loan market. The state program of preferential car loans was extended for 2024-2026 and allocated 15 billion rubles more than planned. And the unsecured consumer loan market is growing largely due to on-lending. In addition, many borrowers use an unsecured personal loan to pay for a down payment on a mortgage.

— How do you explain this consumer behavior? Don’t high stakes scare people?

— So the fact of the matter is that the population’s demand for credit is growing mainly due to state programs of preferential lending with rates significantly lower than market ones. Take away these benefits, and the credit “bubble” will immediately burst.

— Considering the fact that poor people take out loans, as you noted earlier, it turns out that they themselves are worsening their financial situation?

– Exactly. There is a debt burden indicator (DLI), which demonstrates what share of his income the borrower spends on servicing the loan. And this figure is not encouraging: according to the Central Bank, in the third quarter of 2023, 34% of mortgage housing loans issued under DDU (equity participation agreements) were to borrowers with a debt burden above 100%.

— Can we talk about the formation of a “bubble” in the mortgage market?

— Quite, although the regulator prefers to use the term “market overheating.”

– So what should we do?

— The negative effect of an increase in the key rate (slowdown in economic growth) turns out to be stronger than its positive effect (slowdown in price growth). In order to correct the situation, it is necessary to curtail government programs on preferential lending, which are distorting the economy. But this must be done carefully to avoid an economic crisis.