Key bet: what it is and what it affects

What you need to know about the key rate, how it affects the ruble exchange rate and the personal finances of citizens is in the Kommersant reference.

What is a key rate

The key, or base, interest rate is the minimum interest rate at which the Central Bank of Russia issues loans to commercial banks. A commercial bank takes out a loan from the Central Bank based on the key rate. Then the bank issues loans to citizens at a higher interest rate, that is, it makes a markup. Banks make money on the difference in interest rates.

The key rate is also one of the tools that allows the Central Bank to control the ruble exchange rate and influence the economy. A low rate means money is cheap. As a result, companies and the population are taking out loans more actively, businesses, and with it the economy, are developing. A negative consequence of such a policy could be an increase in inflation: money is cheap, so there is a lot of it.

How does a decrease and increase in the key rate affect

When the key rate increases:

— loans become more expensive, which may contribute to a short-term increase in prices for goods and services; in the long term, an increase in the key rate usually leads to a decrease in inflation, however, as a rule, this takes time – six months or more;

— people start saving and buying less;

– unemployment may rise; if a business does not make a profit, it is closed;

— deposit rates are rising, people are motivated to save money.

When the key rate is lowered:

— loans are becoming cheaper, commercial banks, following the Central Bank, are reducing interest rates;

— favorable loan conditions give a business the opportunity to expand production, range and list of services;

– unemployment may decrease, business growth will lead to the creation of jobs;

— consumer demand is growing;

– prices are rising, that is, inflation rates are increasing;

— interest rates on deposits decrease, deposits become less profitable.

How the key rate affects the ruble

A decrease in interest rates leads to a decrease in the value of the national currency because it becomes more affordable. Investors in the foreign exchange market prefer to get rid of cheap money and transfer to more profitable foreign currencies. Currency speculation further reduces the exchange rate of the national currency, which is becoming plentiful on the market.

When the rate rises, investors come to the market wanting to invest in a stronger unit and profit from its growth. As a result, speculators buy the national currency from the market – and the rate stabilizes.

How the key rate affects the stock market

When the Central Bank lowers the rate, the interest rate on bonds decreases along with it. But those bonds that are already sold on the market by this time are rising in price, because their yield is higher, since it was calculated at the previous interest rate. If the Central Bank raises rates, old bonds become cheaper because new ones provide their owners with greater returns.

In addition, when the rate decreases, the difference between the yields of bonds and stocks grows: the yield of the latter becomes higher. This also spurs demand and helps quotes grow. When rates rise, the reverse process occurs: investor interest shifts in favor of bonds, which offer stable high returns at high rates.

What is the current key rate?

At a meeting on February 10, 2024, the Board of Directors of the Bank of Russia decided to maintain the key rate at 7.5% per annum. How reported press service of the Central Bank, the current rate of price growth is increasing, but remains moderate in terms of sustainable components. Inflation expectations of households and businesses have decreased, but remain at an elevated level.

The dynamics of economic activity are shaping up better than the October forecast, and there are also signs of a recovery in consumer activity. At the same time, the acceleration of budget expenditures, the deterioration of foreign trade conditions and the state of the labor market increase pro-inflationary risks.

If pro-inflationary risks increase, the Central Bank will assess the feasibility of raising the key rate at the next meetings, the regulator said in a press release.