The Central Bank lowered its key rate for the first time in three years. Why is this important?

The Bank of Russia has decided to reduce the key interest rate from 21% to 20%. Monetary policy easing has occurred for the first time since September 2022. What a reduction in the key rate means and how it will affect the finances of Russians is in the Izvestia article.

Lower interest rates on deposits and loans

• The reduction in the key rate means that commercial banks will now be able to receive money from the Central Bank for 1% cheaper than before. This will allow credit institutions to reduce the interest on loans and mortgages. The Central Bank notes that in recent months there has been a revival in the mortgage lending market.

• Banks assumed this outcome, so they began to reduce deposit rates in advance: since their money has become cheaper, it is less profitable to attract it from the population at the same rates. But due to the fact that this process has been going on for several weeks, and also due to the fact that the decrease was only 1%, now we should not expect a sharp drop in the cost of loans from banks. However, if the Central Bank's rate reduction trend continues, the yield on securities will decrease (especially for floating-income investment bonds, which are directly linked to the key rate).

• The slowdown in inflation allowed reducing the key rate. In April, seasonally adjusted prices increased by 6.2% compared to the same period last year, and in the previous quarter this figure reached 8.2%. As of June 2, annual inflation stopped being in double digits and slowed to 9.8%.

Calculation of a further decrease in inflation

• Rapid changes in the economy should not be expected, as the decline turned out to be more modest than experts had predicted, and the interest rate remains very high, which means a tight monetary policy. The Central Bank intends to adhere to this policy until the end of the year and sees no signs of economic hypothermia that would require immediate easing of measures.

• The regulator predicts a further reduction in the rate, depending on how evenly prices will decrease. There are still risks of accelerating inflation in the economy, since its decline is uneven, and an additional risk is created by stable inflationary expectations of the population: they are influenced by an increase in the cost of products, which significantly outstrips the dynamics of prices for durable goods. People's moods may also be influenced by the expectation of annual indexation of utility tariffs from July 1, although these changes were taken into account in the Central Bank's forecast.

• The central Bank expects that in 2026 it will be possible to reduce inflation to the target of 4%, which does not exclude easing monetary policy at the next meeting on July 25. The decrease in tension in the labor market adds to the optimism — a reduction in the number of vacancies and a decrease in salary expectations, which spurred inflation. Experts predict that by the end of the year, the key rate may drop to 17-18%.

• By lowering the key rate, the Central Bank signaled that the period of "tightening the screws" in the economy was over. This means that companies and organizations that are forced to save money at high rates will be able to start planning new investments and innovative projects.

During the preparation of the material, Izvestia interviewed:

• Maxim Chirkov, Associate Professor of the Department of Economic Policy and Economic Measurements at GUU;
• Georgy Ostapkovich, Director of the Center for Economic Studies of the IIEZ of the National Research University of Higher School of Economics.