The Central Bank kept the key rate at 14% per annum

The reasons for the latter include rising household incomes and an increase in the credit supply, which boosts consumer demand. In this case, in order to achieve the inflation target of 4%, it is necessary to reduce consumer demand. This can be done primarily by reducing the volume of loans issued—namely, by raising the rate—which is what pushed the Central Bank toward a decision to increase the key rate. However, raising it also has negative effects: the interest rate will increase not only for consumers but also for producers, which will reduce the investment component of GDP and slow its growth, which cannot be allowed. Under these conditions, the most reasonable decision was to keep the rate unchanged.

The result of this decision will be the absence of cheap money through the end of the year: mortgages and consumer loans will remain expensive, but bank deposits for the public and investments in OFZ federal loan bonds will remain attractive. This will increase borrowed funds for banks and also boost budget revenues, which ultimately may lead to an increase in investment flows.

By the end of the year, two more meetings of the Bank of Russia on the key rate are expected, but most likely only at the second meeting can a slight rate cut be expected, and only if inflation declines and budget expenditures decrease.

Author: Doctor of Economics, Professor of the Department of World Economy and World Finance at the Financial University under the Government of the Russian Federation Elena Borisovna Starodubtseva.