Considering the question of what a key rate is, it will be natural to note that this concept is a relatively new instrument of monetary policy in Russia. The practice of using this tool in the West is very common, since with it you can have a significant impact on the exchange rate of the national currency. If we take into account the specifics of the economy of the Russian Federation, then the key rate peculiarly affects the situation in the country.
A bit of history and the actual situation
Studying the question of what is the key rate, it is worth saying that this is the price that is used when the Central Bank provides financial support to commercial financial institutions. The indicator is expressed as a percentage accrued on a loan granted by the Central Bank to smaller financial institutions. In Russia, the concept appeared only in 2013. The main goal of introducing this tool is to exercise control over the inflation process. Until 2013, it was decided to use the refinancing rate for this purpose. The financial policy was modernized due to the fact that the refinancing rate ceased to reflect the real situation on the resource market. The central bank determines what indicators the key rate will correspond to . The refinancing rate, which differs significantly from the Constitutional Court, was also formed by the Central Bank. Revaluation of the COP is carried out monthly (based on the actual situation on the market).
How did the rate change over time?
Over the past year, the parameter has been changed many times. Initially, the indicator corresponded to 5.5%. In the period from March to June 2014, it changed repeatedly: 7%, 7.5% and 8%. At the end of October 2014, the size of the COP reached 9.5%. As early as December 12, 2014, due to a sharp increase in the dollar exchange rate, the Board of Directors of the Bank of Russia converged at 10.5%. Due to the fact that the change in the rate did not bring the expected result and there was no influence in the expected volume on the market, on the 16th of the same month the rate already began to be 17%. February 2, 2015 it was reduced to 15%. At the last meeting, which took place on March 16 this year, it was decided to set the rate at 14%.
What happened before?
The key rate of the Bank of Russia is an analogue of the refinancing rate. Today, CP is used to calculate fines, fines and taxes. It has long remained at the level of 8.25%. If earlier it served as a starting point for determining interest on loans, today it does not fulfill this function. Until September 13, 2013, the SR was considered the most important economic indicator, which reflected the economic processes in Russia. The secondary task of SR remains today. It is used as an indicative indicator for analyzing the level of inflation and the market as a whole. The key rate of the Central Bank of the Russian Federation is a tool that has almost completely replaced the CP as an indicator of the economic situation.
The influence of the Constitutional Court on the situation in the country
By changing the Constitutional Court, the Russian government can control inflation. An increase in the key rate leads to a rise in the price of resources of commercial financial institutions, there is a sharp increase in interest on deposits and loans. High interest rates make lending to individuals unavailable to most. The reduction in funds leads to a sharp drop in purchasing power. The pressure on the ruble is significantly reduced, inflation is halting. If the economy is slowing down due to a decrease in production, then a phenomenon such as deflation appears. The Bank of Russia Council decides not to raise the key rate, but to lower it. Loans are becoming more affordable, lending to the real sector of the economy begins. The situation is leveling out.
Tool Features
Studying the question of what is the key rate, it is worth mentioning the absence of this tool in the legislation of Russia. Its place is still occupied by the refinancing rate, although its role in fact is very insignificant. Everything is limited to the calculation of sanctions, interest and taxes. By the end of 2015, the COP should completely replace the CP. The main advantage of using this tool is that it can be used to adjust the level of inflation and, therefore, have a very positive effect on the recovery of the state economy. Traders all over the world are closely following the CS of large market participants (America, Switzerland, Japan, Canada, etc.). On the eve of the announcement of rates on the market, you can see a lot of volatility. If the rate changes, then a significant jump occurs. The key rate of the Central Bank of the Russian Federation is a financial instrument that is not without drawbacks. It is worth saying about its inertness and low efficiency in a crisis. With a sharp deterioration in the economic situation, especially if the impact on the state is exerted by external factors, the change in the rate does not have time to harmonize the situation, and the negative consequences of the effects are manifested.
Alternatives and Prospects
Considering the question of what is the key rate, it is worth saying that in a crisis it is better to replace it with command and administrative measures. This may be a course freeze or state regulation of prices in the market. Financial standards may also be tightened. If we look at the situation using the example of Russia, it becomes obvious that raising the rate to 17% did not bring the expected result, not only because of the approaching devaluation of the ruble, but also because of sanctions from the west. The cardinal change in the indicator, due to its little effectiveness, was soon reduced, first to 15%, and then to 14%. At the moment, the Central Bank has no reason to further raise the rate. This decision can only lead to more expensive banking products, which are still inaccessible to the majority of the population. If we take into account that Russia is now doing its best to provide financing for the real sector of the economy, we can talk about a further decrease in the COP.
Current news on the Constitutional Court and changes in tax legislation
The key rate of the Bank of Russia is the “secret weapon” of the Central Bank, which was introduced into monetary policy in order to improve its transparency. The latest critical increase to 17% was recorded at the beginning of 2015. As a result, commercial financial institutions began to actively raise rates not only on loans, but also on deposits. Moreover, in accordance with the law, interest on ruble deposits, which is 5 percentage points higher than the SR, must be taxed (PIT). Given that SR after the increase in the COP remained the same, deposits with a yield of more than 13.25% (which turned out to be the majority) began to be subject to tax. Earlier, the number of deposit programs with a return of more than 13.25% was minimal, today they are the majority. Almost all people with deposits fell under personal income tax.
Workaround for non-compliance
As a result of the legislative discrepancy, depositors had to pay about 35% of the excess profit tax. As a result of this development, it was decided to amend the tax law. The premium of 5 percentage points has been changed to plus 10 percentage points. Ruble deposits with a return of 18.25% do not fall under the tax system. The accepted exemption is a temporary solution that expires on December 31, 2015. In the future, it is planned to reduce the level of both refinancing rates and the key rate to one value.
What can the COP tell?
As mentioned above, the Constitutional Court is an indicator of the state of the Russian economy. And studying the question of what is the key rate of the bank, you need to pay attention to the presence of correspondences between the size of the indicator and the state of affairs in the country. At a low interest rate, we can say that the ruble is very weak, and the national currency is excessively low. A high interest rate indicates a slowdown in the economic development of the state in the near future. The amount of money that is in circulation begins to decline, and the exchange rate of the national currency increases. If we take into account that after the winter rate hike in Russia, the ruble rate slowed down, now it’s rational to say that the next decrease in the CS may lead to stabilization of the situation and to cheaper dollar. The domestic economy will be actively developing, and the state found the solution to all problems precisely in answering the question of what is the bank’s key rate for the country.