The economic growth of most countries of the world depends on how competently the policy of the Central Bank is implemented. One of the main tools used by the Central Bank of different countries is the key rate.
The Russian Central Bank was no exception. But in the practice of his work, he introduced this term relatively recently, replacing it for many years with the phrase "refinancing rate." The key rate is becoming one of the main regulators of the country's economy, turning into a subject of discussion between financial market analysts . There are experts who see it as an instrument that, as in developed countries, defines the main vectors of macroeconomic regulation, and helps to prioritize the management of the state economy. Is it so? Is the role of the central bank key rate prescribed by experts so great? Perhaps this is a completely useless figure used by the authorities only to justify their actions?
Central Bank Key Rate - What is it?
Key rates are the values that the main financial institutions (most often state central banks) of countries determine for loans (deposits) issued to private banks. They have a certain validity period. This financial instrument allows you to have a direct impact on inflation, as well as on trading in the national currency.
If, for example, the key rate of the Central Bank of the Russian Federation rises, then, according to some economists, the ruble may rise in price against the dollar and the euro, accompanied by a decrease in inflation.
Differences from the refinancing rate
In the fall of 2013, many analysts noted an innovation in the policy of the Central Bank of Russia: the refinancing rate ceased to be the main indicator of the strategy of this financial institution. The Central Bank has determined that the so-called key rate is the most important indicator for the economy. According to her, the Central Bank provides liquidity for a week. The refinancing rate and the key rate are not the same, but the first has not been completely canceled by the Central Bank - it will continue to be used until 2016.
By that time, its value will align with the indicator for the second. Analysts of some banks believe that such a policy of the Central Bank is quite logical: weekly repo auctions are the most popular in the country's financial system, and it is key rates that can help determine the actual price of the money that the Central Bank throws into the market. While the refinancing rate, analysts believe, was mostly indicative.
Taylor rule in the Russian economy
Key rates make up a comprehensive model of economic indicators that works according to the so-called Taylor rule. Most Central Banks of foreign countries are guided by it, forming interest rates. There are three main indicators in Taylor’s formula: inflation, economic growth and, as such, rates. It is easy enough to calculate the optimal value of each of them, knowing the two remaining ones. For example, for the fall of 2013, the value of the key rate of 5.6-6.3% would be fair, based on the indicators of GDP and the level of inflation in Russia. It turns out that Russian bankers are approaching Western standards for understanding the laws of the economy.
Betting in Europe
Key rates, as noted above, are used in most banking systems in the world, including in Europe. Their current value is much lower than in Russia - now the ECB operates with values of less than 1%. Regulation by the European Central Bank is designed to improve the current state of the economy of the states of this part of the world. The ECB is called upon to make decisions on assistance to financial institutions in Europe and the EU in particular.
Experts note that in some cases, approval of negative rates is possible - this can have a positive effect on lending. Banks, having access to cheap loans, can, in turn, facilitate the receipt of money from national borrowers - citizens, organizations, which ultimately will help reduce unemployment and stimulate economic growth. Among the negative consequences of the introduction of negative rates, the following is noted: there is a possibility that the real profitability of bank deposits of citizens may decrease.
Key rate in Russia
The key rate of the Central Bank of the Russian Federation, as well as in Europe, is one of the instruments for influencing the national economy. The practice of banking regulation in Russia knows cases when its value increased immediately by several tenths of a point. For example, at the end of April 2014, the Board of Directors of the Central Bank of the Russian Federation decided to increase the key rate from 7% to 7.5%. The Central Bank motivated this step by the fact that inflation expectations have changed. If a few months earlier its target level was about 5% by the end of 2014, then at the time of adjusting the key interest rate, the Central Bank’s expectations became somewhat more pessimistic.
The Central Bank named several factors for changing its forecasts: the dynamics of the ruble exchange rate, as well as adverse conditions in the foreign trade arena for some groups of goods. Analysts note that the Central Bank practices the so-called preferential refinancing, when loans are issued by credit and financial institutions at a rate lower than the key interest rate of the Central Bank of the Russian Federation.
Arguments for reducing the key rate
Opinions in the expert community regarding the policy of the Central Bank of Russia regarding key rates are shared. There are supporters of the thesis that it is necessary to lower the values of this regulatory financial instrument. Their main argument is based on the fact that the risks of a slowdown in the country's economy are much higher than those associated with inflation. Therefore, when the Bank of Russia key rate rises, this can adversely affect the dynamics of GDP. Moreover, to reduce its value there are, experts say, significant conditions. First of all, analysts say that inflation does not exceed expected values, but not by much - we can expect that by the end of the year it will be 6-6.5%. In historical retrospect, these are completely normal figures for the Russian economy. Some players in the political arena propose a radical approach to the interaction between the government and the Central Bank: through a special kind of bills. Recently, such a project was submitted to the State Duma, and according to it, an order is put forward to the Central Bank: the key rate cannot be higher than 1%. According to the initiators of this bill, the current values do not allow organizations to take affordable loans, as is the case in many developed countries.
Arguments for raising the key rate
There are representatives of the opposite point of view in the expert community - they believe that the key interest rate should increase. In their opinion, one should not expect a positive effect on the availability of loans, since a low percentage would in reality be available only to large companies. Medium and small enterprises could at best rely on values of 6-8%. This state of affairs, experts believe, is due to risks posed by small-scale organizations. In addition, analysts emphasize, for the Central Bank, the key rate is an instrument of influence on inflation, and a decrease in it can mean the release of prices, getting out of control.
Forecasts at a key rate of the Central Bank of the Russian Federation
Many economists believe that the Central Bank of Russia will still lower its key rate. It is likely that this trend will become noticeable in the second half of 2014 - unless, of course, sudden problems appear in the economy. The authorities expect inflation to slow down somewhat (and this factor is one of the key key rate values in the process of determining the Central Bank), the ruble exchange rate will stabilize, and demand for deposits in the national currency will increase. Also, importantly, a good grain harvest is expected.
Therefore, experts believe that the current policy of the Central Bank is more stringent than the market objectively requires. Some analysts believe that the Central Bank’s statements that rates need to be raised can only be attempts to contain inflation by rumors. In reality, the Central Bank has no reason to expect a price increase, but on the contrary, they will be corrected down. In this regard, optimistic experts believe that the key rate for 2014 will not undergo significant upward fluctuations: it is much more likely that the Central Bank of Russia will prefer to lower it.
Political factor
Some banking analysts say that the relationship between Russia and other countries may affect the actions of the Central Bank. In the event of an unfavorable situation in the foreign policy arena, the ruble may weaken, and capital will be withdrawn from the country. Inflation will increase. But if relative stability is maintained in international relations (one of the main criteria of which will be Russia's non-interference in Ukraine’s affairs), then there is every reason to expect that the key interest rate of the Central Bank will remain at current values.
Analysts believe that this should be facilitated by what has become, in their opinion, the traditional slowdown in inflation in the summer months. They expect that the Central Bank, seeing that prices are not rising, will not make sudden movements in terms of regulating the key rate. At the same time, supporters of this point of view emphasize that the Central Bank still needs to lower the rate at least to the level of 5.5%. Let in the long run.