The Central Bank intends to raise the key rate: how it will affect ordinary Russians

For almost a year, the key interest rate of the Bank of Russia remained at the same level – 7.5% per annum. This meant that, to the great delight of borrowers, interest on loans did not increase for almost a year, and in some banks, any adult citizen with a good credit history could get an unsecured loan at a record low rate. But bank depositors were not very happy with the lack of growth in interest on deposits. But in the coming days, everything can change. The Bank of Russia at the next meeting of the Board of Directors, scheduled for July 21, will most likely raise the interest rate. This means that depositors will soon be able to place their funds on deposits in reliable banks at higher interest rates than today, and those who wanted to get loans at a relatively low interest rate need to hurry – interest rates on them may increase.

Recall that the last time the Central Bank of the Russian Federation raised the key rate in February 2022, and immediately to 20% per annum. Why was this done? Such a tool as raising interest rates is used by central banks around the world to combat rising inflation. In March 2022, due to the start of the NWO, the blocking of half of Russia’s gold and foreign exchange reserves in Western countries, new sanctions and the withdrawal of a number of foreign companies from the country, the ruble collapsed, allowing the dollar to rise above 110 rubles for a short time. The collapse of the ruble threatened Russia and Russians with hyperinflation, stagnation of the real sector of the economy, a subsequent collapse in real incomes of the population and a sharp decline in the standard of living in the country. Despite the fact that inflation in the Russian Federation rose to double digits a month after the short-term fall of the ruble, its maximum was limited to 17.8% per year, and the collapse of the economy, which many predicted in late February-early March, did not occur, only a moderate decline GDP in 2022. The worst possible scenario for the development of events in the Russian economy was helped to avoid the competent monetary policy of the Bank of Russia. Having sharply raised the key rate to 20% per annum in February last year, the Central Bank of the Russian Federation began to reduce it since April last year. In September 2022, the reduction of the key rate slowed down at the level of 7.5% per annum, and this figure has not changed until today.

However, it seems that today is the time to change the value of the key rate again. But not in the downward direction, but on the contrary, in the upward direction, although, of course, not by such a large amount as it was in February 2022. First, annual inflation, which has been declining almost continuously since December 2022, began to rise again in June. Of course, inflation growth in June was not too strong – only from 2.5% to 3.25%, but nevertheless, if measures are not taken in time to further curb it, inflation may become uncontrollable. Secondly, in June and early July, the ruble again, like in the spring of last year, began to weaken. The dollar already exceeds the level of the optimal corridor for the Russian economy of 80–90 rubles designated by the Russian government. Russia this year receives less income from exports than a year earlier. The trade balance (difference between exports and imports) fell to $20 million in the first half of this year, which is 7 times lower than the corresponding value in the first half 2022. This means that the state budget does not receive oil and gas revenues in a significant amount, and therefore Russia is now forced to live with a budget deficit. And he is able to accelerate inflation even more, so central banks in such cases raise interest rates to curb consumer price growth. That is why, most likely, the Bank of Russia at a meeting of the Board of Directors on July 21 will decide to raise the key rate. With the highest probability, we expect the key rate to rise by 0.25 percentage points to 7.75% per annum. We believe that such a decision will be possible, since, on the one hand, there is an acceleration in inflation growth, and on the other hand, inflation in Russia in June of this year remained below the target level of the Central Bank of the Russian Federation of 4% per year. However, if inflation continues to rise even after the key rate hike, another increase in the key indicator can be expected in September, to 8% or even to 8.5%.

If the key rate is raised, this will not mean that an economic crisis has begun in Russia or that the country is in danger of falling into an economic crisis. Changing interest rates by central banks is a completely normal tool for fighting inflation, which they use not necessarily in times of crisis. On the contrary, the sooner the Central Bank notices a trend towards rising inflation and the depreciation of the national currency, and the sooner it takes measures to prevent uncontrolled inflation, the higher the chance that the economy will pass such tests calmly, without falling into either a crisis or a recession. So, if the key rate is raised, this is not at all a reason to be afraid and take deposits from banks. On the contrary, the most interesting thing will begin for the population, since banks will begin to raise deposit rates, money can be placed in a bank at a higher interest rate than today.

The negative aspects include the growth of interest rates on loans. Borrowers will certainly be dissatisfied with the increase in interest rates on loans, but those who have already received and service loans will not be affected by the increase in the key rate and its consequences. At the same time, small and medium-sized businesses and the real sector of the economy in general will not be delighted with the increase in interest rates, because credit resources will be less accessible to them than before. On the other hand, rising interest rates could help cool down the credit market, which is already starting to overheat, and prevent a possible “credit bubble”.

This year, according to our forecast, the Russians can expect at least two increases in the key rate of the Central Bank of the Russian Federation. Most likely, Russia will end 2023 with a key rate of 8-8.25% per annum. But it is precisely the increase in the key rate that will help curb the growth of official inflation in the Russian Federation, which, according to our estimates, will not exceed 7% in 2023. And in 2024, according to the Bank of Russia, inflation will have to slow down to the target level of the Central Bank of the Russian Federation of 4% per year. If this happens, in Russia, most likely, in the second half of next year, a cycle of lowering interest rates will begin to the delight of borrowers and the real sector of the economy and to the dissatisfaction of bank depositors who have not yet had time to place their funds on deposit at a relatively high interest rate.

When there is a tendency to raise the key rate of the Central Bank of the Russian Federation, ordinary citizens can be advised, first of all, to keep money on ruble deposits, since the interest on deposits will look attractive. It will also be attractive to invest in ruble-denominated federal loan bonds (OFZ) – although the yield is low, the reliability of the issuer, which is the Government of the Russian Federation, is beyond doubt. And you can diversify your investments in order to minimize inflationary risk by investing in investment gold or shares of highly reliable companies that pay good dividends.

Published in the newspaper “Moskovsky Komsomolets” No. 29073 dated July 19, 2023

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