Price reaction: what instruments besides the key instrument the Central Bank can use
In addition to raising the key rate, the Bank of Russia has other methods of cooling inflation: tightening lending regulations, increasing the reserve requirement and controlling theexchange rate, experts interviewed by Izvestia listed. The regulator has already implemented some of them this year. President Vladimir Putin said at the combined direct line and press conference that the Central Bank probably should have used these tools earlier. However, under sanctions, raising interest rates is still the most effective mechanism. Why it has more and more critics and what decision the Central Bank will make on December 20 - in the material "Izvestia".
How does Putin feel about the Central Bank's policy and the high key rate?
Russia's economy is growing rapidly (by 3.9-4% by the end of the year), as well as real wages - by 9% - the president began his speech on the direct line with these data. However, by the end of 2024, inflation has accelerated to 9.2-9.3%, said Vladimir Putin. However, he emphasized: these are average figures, and subjectively each person can feel it differently. The main reason for the rise in prices is that the supply of goods on the market is not catching up with demand.
- Our incomes and wages have been growing faster than the growth of this commodity mass and output. <...> There are simply not as many products as consumption has increased. This is the first thing," said the head of state.
Russian President Vladimir Putin during the program "Results of the Year" in Gostiny Dvor. In 2024, a direct line with citizens and a large annual press conference with journalists are held in a combined format
The second objective reason is the harvest, the third is the growth of world prices for some products, the president listed. External restrictions and sanctions also have an impact, as they make logistics more expensive, he added. But there are also shortcomings. According to Vladimir Putin, the government needs to work in a more timely manner in the sectoral context, to think about the development of individual industries, goods of wide demand.
- Some experts believe that the Central Bank could more effectively and earlier start using certain tools not related to raising the key rate. Yes, the Central Bank started to do this in the summer. But, I repeat, these experts believe that it could and should have been done earlier," emphasized the President.
Dissatisfaction with the policy of the Bank of Russia, which raised the rate to a record 21% in October, has indeed been expressed at various levels in recent months. In particular, the topic was raised at the president's meeting with the business community on December 16. In addition, on the eve of the direct line, the head of the party "Just Russia - For Truth" Sergei Mironov called the actions of the Central Bank "malicious".
- This is the fulfillment of the decree of the International Monetary Fund. <...> Mrs. Nabiullina, since July last year you started raising the discount rate. How much has inflation increased? Twice as much. Hey, Mrs. Nabiullina, are you somehow adequate or not? - said the deputy.
The Central Bank began to raise the key rate in the summer of 2023 - then it was at 7.5%. By December 2023 it was increased to 16%, then the Bank of Russia took a break. However, in the summer of 2024 the key rate was resumed - in October it reached a record 21%, and this is probably not the limit. A high key rate makeslending less profitable and deposits, on the contrary, more attractive. People spend less and save more, which reduces aggregate demand and should "bring down" inflation.
However, the high rate also makes loans less favorable for business, and companies now especially need financing to rebuild the economy, import substitution and increase supply.
What tools does the Central Bank have besides the key rate?
Alternative methods of restraining lending include quantitative restrictions on loans, said Olga Belenkaya, Head of Macroeconomic Analysis at Finam. Macroprudential surcharges increase the load on the bank's capital when issuing a certain type of loans: the higher the value, the more capital reserves are required. The Central Bank began to actively use these restrictions in 2024.
On July 1, the regulator raised macro surcharges for loans with a full loan value of 25-40%. And from September 1, it introduced surcharges for almost all unsecured consumer loans. In the summer, tightening appeared for car loans as well - the Central Bank established surcharges to risk ratios for loans granted to borrowers with a debt load indicator (DLI) over 50% (i.e. those who spend more than half of their income on debt repayment).
The regulator has also tightened restrictions on unsecured loans to borrowers with high debt burden for the fourth quarter of 2024. So, for example, banks are allowed to issue such loans to Russians with PDN more than 80%, but the share of such loans in the total volume of disbursements can not exceed 3%. Cash loans to citizens who spend on debt repayment from 50 to 80% of income, should take a share of a maximum of 15% of the bank.
However, the leadership of the Central Bank has always considered macroprudential regulation measures not as a tool to reduce inflation (considering it more of a side effect), but as a mechanism for financial stability, said Olga Belenkaya. Nevertheless, when the key rate is already high and sufficient to make ruble savings attractive, the use of bank regulation can enhance the effect.
The regulator has other tools - for example, open market operations on the purchase and sale of securities (it affects the amount of liquidity - free money in the economy) orincrease the reserve ratio (it affects how much of the funds attracted on deposits, the bank can issue as loans, and what - must keep in reserves), listed an independent expert Andrei Barkhota. However, under the conditions of sanctions, their use would hardly help to "bring down" inflation.
- These instruments cover the monetary transmission of the consumer sector and industry, while inflation in Russia has imported roots. The ruble devaluation and the growth of producers' costs are fueled by unprecedented sanctions," explained Andrei Barkhota.
In today's conditions, the regulator has very few tools to fight inflation, economist and former Finance Minister Mikhail Zadornov said in his column for Izvestia. The ruble exchange rate is no longer a balancing mechanism. Also, the Bank of Russia has lost the ability to manage a significant part of gold and foreign exchange reserves.
- As a result, apart from the key rate and direct quantitative restrictions on lending, the Central Bank has no means of controlling price growth. Raising the interest rate can be compared to aspirin: it is a simple, clumsy, but effective medicine," said Mikhail Zadornov.
How the Central Bank will tighten lending rules in 2025
One of the reasons why raising the key rate was not effective enough to slow down lending is the presence of a large volume of soft loans, explained Olga Belenkaya from Finam. For example, we are talking about preferential non-addressed mortgages for new buildings - demand for housing jumped because of it, as well as real estate prices. On July 1, 2024, the program was closed.
At the same time, the Bank of Russia is now more actively using alternative methods. For example, in the first half of the year it is planned to introduce surcharges to risk coefficients for loans to large companies with a high level of debt. This will help financial organizations to accumulate a capital buffer to cover the risks of corporate lending, Olga Belenkaya explained.
In addition, from April 1, 2025, the Central Bank of Russia will have the right to set macroprudential limits on mortgages and car loans, that is, they will introduce quantitative restrictions on the issuance of high-risk borrowers.
What decision the Central Bank will make on the key rate in December
The Central Bank meeting on the key rate is scheduled for the day after the direct line - December 20. According to Izvestia's consensus forecast, a week before the meeting, the market expected that the rate would be raised to a new record of 23%. This option still remains the main one, according to experts interviewed by Izvestia.
In response to a question from Pskov Region resident Valery Semyonov about whether Elvira Nabiullina told the president about the December rate decision, Vladimir Putin replied:
- She doesn't tell me what the rate will be. She herself probably doesn't know it yet, because they are discussing it at the board of directors, at their Komsomol cell, and in the course of discussions they make the final decision. But I hope that it will be balanced and will meet the requirements of today.
The head of the Central Bank herself said that the decision of the Central Bank is not predetermined, although the regulator has signaled the possibility of raising the key rate in December.
Nevertheless, an increase in the rate to 23% may become a kind of "compromise" between the current inflation picture (which could justify a stronger growth) and the grounds for a slowdown in inflation in the future, believes Olga Belenkaya.
According to Natalia Milchakova, a leading analyst at Freedom Finance Global, the peak of the key rate hike is near. And next year inflation may slow down to 6-8%.
