Where to grow: what to expect from the next Central Bank meeting on the key rate

The next meeting of the Central Bank on the key rate will be held tomorrow. Economic experts associate the rate level with economic growth, and attribute the slowdown in growth this year primarily to a long period of high interest rates. In 2023-2024. Russia was among the leaders of economic growth, with GDP growth of +3.6% and +4.3%, respectively. This year, the Central Bank forecasts growth in the range of 1%. Izvestia investigated whether the rate would decrease and whether it was important for the resumption of economic growth.

Narrowing of space

"It is highly likely that on September 11, the Central Bank will take a break to assess the effect of the July reduction and keep the rate at 14%," said Eduard Lysenker, partner at S+ Consulting. In the future, the regulator will continue to follow a step-by-step mitigation strategy at the slightest signs of a steady decline in inflation, the expert believes.

But if the Central Bank does not start a more confident easing cycle in the fourth quarter, we risk switching from containing inflation to managing stagflation, Lysenker continues: we are already seeing pent—up investment demand - in the first quarter, fixed asset investment decreased by almost 15% year-on-year. The average profitability of a business in the country does not exceed 12%, and the effective lending rate rarely falls below 18-20% per annum. A high key rate reduces investment activity and, paradoxically, becomes a price growth factor in itself, the expert says.

Companies are forced to factor rising costs into the final cost of their products, which increases inflation. Thus, not only investment demand is shrinking, but also consumer demand.

"Last week, the Central Bank announced a narrowing of the space for rate cuts due to supply shocks and rising budget spending. The Central Bank is likely to maintain the rate or reduce it by a symbolic 0.25%," predicts Anton Sviridenko, executive director of the Stolypin Institute for Growth Economics.

"The Central Bank believes that it seems that the current shortage of labor can lead to inflation in the country with a relatively inexpensive loan. This leads to the conclusion that it is necessary to raise and maintain the key rate at a relatively high level," said Alexander Shcherbakov, Professor at the RANEPA Presidential Research Institute, Doctor of Economics.

The rate against inflation

The high rate in 2024-2026 helped keep inflation low, although the Central Bank's target of 4% was never reached. But then this method may lose its effectiveness, experts say.

"The Central Bank sees the high rate level as a means of combating inflation. But there are other significant factors that determine inflation. For example, an increase in the tax burden is embedded by businesses in the cost of products and services, and in 2025-26, income tax and VAT rates increased, and the threshold for VAT to be paid for small businesses was lowered," said Igor Nikolaev, Chief Researcher at the Institute of Economics of the Russian Academy of Sciences, Doctor of Economics.

Another stable factor of inflationary pressure is the growth of budget expenditures, Nikolaev continues: according to the Ministry of Finance, this year they will exceed 45 trillion rubles, an increase of almost one and a half times in nominal terms compared to 2023. The growth of regulated tariffs also spurs inflation.

"The economy can only withstand such a high interest rate for a limited time. This was the case in 2023-24, when the economy used internal reserves, budget support, and some other adaptation methods. But when such a monetary policy lasts longer than a year, then inevitable problems begin at the enterprise level, at the industry level, at the regional level, and at the budget level. This policy is beginning to harm the processes within the economy, leading first to a slowdown in growth, then to stagnation," said Dmitry Kuvalin, Deputy Director and head of the Laboratory for Analysis and Forecasting of Microeconomic Processes at the Institute of National Economic Forecasting of the Russian Academy of Sciences, Doctor of Economics.

Russia needs to catch up with the global average economic growth, but the Central Bank has not yet set high growth rates for this year, lowered its forecast for GDP growth to 0-1%, and expects growth of 1.5-2.5% annually in the coming years, Kuvalin recalls.

Measures for growth

Anton Sviridenko explains why the high rate has slowed down growth: years of high and extremely high rates have caused several factors to reduce investment. First of all, the increase in the key rate to 21% by the end of 2024 (from a comfortable 7.5% in the fall of 2023) has reduced the availability of borrowed funds. Secondly, the business found itself in conditions of serious uncertainty, the expected rate cut did not occur, and it became extremely difficult to rebuild financial models. As a result, the business continued to withdraw money from turnover and investments and deposit it as insurance against uncertainty. The largest increase in the money supply during this period occurred precisely in non-working money (deposits), which do not affect inflation, and the working money supply (cash and account balances) grew significantly less.

A lack of investment hinders the growth of labor productivity, which is one of the most important tasks of the economy, adds Alexander Shcherbakov: a shortage of labor does not mean a shortage of labor in the economy, it can and should be replaced by an increase in the quality of labor, skill level, complexity and, consequently, labor productivity. It is precisely the growth of labor productivity that is the most important fundamental resource of the modern economy, and a low key rate seems relevant and appropriate for economic growth, increasing business opportunities in terms of using more advanced equipment, necessary raw materials, and rhythmic, albeit higher, real wages.

A significant sharp reduction in the rate without a set of clear measures can indeed have a negative effect, Sviridenko admits.

"A monetary spiral has formed — huge funds are locked up in deposits, and the investment segment is starving. A simple rate cut (breaking the spiral) will cause an outflow of funds from deposits, with a stagnating supply, this is fraught with serious consequences. This requires a whole range of measures: curbing consumer lending, maintaining the relative attractiveness of deposits, and creating attractive instruments for investing in the economy as an alternative to deposits," the expert said.

But it is necessary to break this spiral, Sviridenko adds, since its continuation will only lead to deepening imbalances and widening the gap between the real and financial sectors. Without investments, there is no technological development, increased labor productivity, increased tax revenues, and new jobs.