The Central Bank allowed a new rate hike: “Confidence in the future will decrease”

Experts told what this means for the economy, the ruble exchange rate and the wallet of Russians

The next meeting of the Board of Directors of the Central Bank of the Russian Federation will be held on September 15. However, the regulator has already sent the market a signal about what decision will be made on it. According to the head of the Central Bank of the Russian Federation Elvira Nabiullina, an increase in the key rate is not ruled out, but she also allows this indicator to remain at the current level of 12% per annum. This is how one can interpret her words that a “neutral signal” was sent to the market. What will these two decisions mean for the Russian economy and the pockets of compatriots, MK crashed.

According to the head of the Central Bank, the reduction of the key rate at the September meeting is unlikely. The regulator raised the rate due to the escalation of inflation risks. It will be possible to think about lowering the rate only when the Bank of Russia sees a steady decline in price growth. At the same time, when making a decision, the regulator’s management will rely on data received by the middle of the first autumn month. “We gave a neutral signal at the end of the board meeting on August 15, in fact, it means both the possibility of maintaining the rate, and the possibility of raising the rate in order to meet our target (for inflation – ed.) 4% in 2024,” – Nabiullina emphasized during the answers to questions on the sidelines of the conference “10 years of the mega-regulator: yesterday, today, tomorrow.” When making a decision, the regulator’s management will rely on data received by mid-September. As pro-inflationary factors, the Bank of Russia will consider “maintaining the current fairly high growth rates of lending”, the budgetary impulse, the possible weakening of the ruble exchange rate, and, “of course, the absence of a reversal in inflation expectations”.

By what amount the key rate can be raised, the Central Bank of the Russian Federation, according to tradition, did not give any hints, just as they did not comment on the degree of ruble weakening, which could affect the decision, leaving all discussions about this on the conscience of experts. “According to my forecasts, the key rate will grow by 2-3%,” says Sergei Ostrovsky, General Director of Bely Ostrov. “If the key rate increases, the cost of loans will rise, and deposit rates will also become higher.” The country’s economy, in particular, production will develop more slowly, the purchasing power of the ruble will decline. This, of course, will add anxiety to people’s lives – confidence in the future will decrease, the analyst concluded.

According to Elena Grigorieva, Deputy Dean for Science of the Faculty of Economics of the Peoples’ Friendship University of Russia, the rise in gasoline prices increases the risks of cost inflation acceleration, as well as a significant increase in the foreign exchange rate. The increase in the cost of credit products was not long in coming, especially in the segments of consumer, that is, unsecured lending. Just a few days after raising the key rate to 12% in August, analysts noted an increase in the average rate on consumer loans among the TOP-20 Russian banks to 20.94% against rates of 19% in May-July 2023. Of course, bank deposit rates also showed growth, thereby creating a competitive advantage over investing in securities on the stock market. Thus, there is an increase in the cost of credit resources, which in market conditions would form an incentive for savings and slow down the consumer activity of the population. For corporate business, the rise in the cost of financial resources in the long run may lead to a decrease in investment activity in terms of modernization and renewal of production assets.

For ordinary Russians, an increase in the cost of loans will lead to a decrease in consumer activity. With a high level of use of credit cards (this is unsecured lending), the risk of delinquency on these types of loans will increase significantly. Banks will evaluate borrowers more strictly, refusing to issue “fast” credit funds. Citizens will turn to MFIs, where the cost of borrowed money is much higher, but it is easier to get such funds. Russians need to remember about financial discipline, try to avoid delays and postpone expensive purchases until more favorable times, the expert emphasized.

“For an already indebted citizen, an increase in the rate can become a negative point, since if it is necessary to refinance these loans, overpayments on interest on the loan will increase,” Vladimir Chernov, an analyst at Freedom Finance Global, continues the conversation. “For those who were just planning to take out a loan, the increase in the rate will also become a negative point, as overpayments on the loan will increase.”

But for potential investors in September, the choice will expand. As the Associate Professor of the Department of State and Municipal Finance of the Russian University of Economics named after. G. V. Plekhanova Meri Valishvili, after the August decision of the Central Bank of the Russian Federation to raise the rate to 12% for those who like to save, the best time has come to open a deposit: the average rate on bank deposits today is 10-11% per annum. True, such advantageous offers are valid when opening a deposit for 3-4 months.

Analysts have not forgotten about the ruble exchange rate either. According to Yegor Diashov, CEO of the investment company Dialot, many people think that the Central Bank raises the rate in order to reduce the exchange rate of foreign currencies. But now the key rate affects only indirectly on this indicator. Currency trading volumes have decreased, now there are no restrictions for exporters who could donate foreign exchange earnings, so inflation is in focus. It arises because Russia is now experiencing economic growth (growth in GDP) with a gradual passing technological backlog. Volumes are growing on old technologies, people are needed, but they are not enough, so any enterprises in the struggle for personnel raise salaries. People can afford more in stores and apply for banking products more actively, gaining confidence in the future with higher incomes. There is an excess of money supply and this leads to inflation. The increase in the key rate is aimed at slowing down this process: to make it less profitable to borrow money and spend a lot in general, so that the population postpones purchases, and businesses postpone the implementation of projects. In the short term, an increase in the key rate will reduce inflation, but in the long term, this hinders the implementation of investment projects, the modernization and development of the economy.

There are far fewer estimates of the consequences of keeping the key rate at the current level among experts than there are arguments about what should be prepared for when it is raised. In addition, they are much more discreet. Thus, according to Vladimir Chernov, if the regulator keeps the key indicator unchanged, it will fundamentally change nothing. However, there is another opinion. “If the key rate remains at the current level of 12%, the country’s economy will more or less stabilize, citizens and businesses will get used to the cost of credit funds and rather favorable rates on deposits and savings accounts,” Ostrovsky says. “Because of this, you will have confidence in your income, in the safety of your investments.”