Central Bank retained key rate

The Central Bank has kept the key rate at the same level – 4.25 percent per annum, according to a statement on the regulator’s website. The decision was expected by market participants.

For the first time, the Central Bank set the key rate at a record low for modern Russia, 4.25 percent in July last year. Since then, the regulator has kept it unchanged three times, explaining its policy by moderate inflationary expectations and the impact on the Russian economy of the consequences of the coronavirus pandemic.

The key rate is one of the main (along with the required bank reserve ratio) instruments of the Central Bank’s monetary policy, the purpose of which is to regulate the inflation rate. According to the regulator’s plan, it should be close to the target of four percent per annum.

The rate reflects the cost of short-term loans provided by the Central Bank to commercial banks (mainly to comply with liquidity standards) and at the same time the level of profitability on deposits with the Central Bank, with the help of which the regulator absorbs excess liquidity from the market with its structural surplus.

The Central Bank’s key rate traditionally acts as a benchmark for profitability on many other instruments: from loans in the interbank market to federal loan bonds (Russian government debt), bank loans and deposits.

Also, the level of the key rate affects the inflow of foreign investors into the country, which can provoke a strengthening of the national currency. The higher the rate, the more likely non-residents will invest in local assets. At the moment, the US Federal Reserve System (FRS) rate is at a minimum level of 0-0.25 percent, which makes real (inflation-adjusted) returns on investments in some US assets negative.

Thus, Russian assets, including government debt, are able to attract foreign investors. In addition, the likelihood of using a carry trade strategy increases, in which an investor borrows funds in a market with a low level of interest rates and invests in instruments in a market with a higher rate, taking advantage of the difference.

Economists surveyed by business publications indicated a high likelihood of maintaining the key rate at the current level, despite the acceleration of inflation in January to 5.19 percent on an annualized basis (0.7 percent on a monthly basis), which was the highest indicator in almost two years .

Analysts indicated that the Central Bank is likely to give up hints on further rate cuts. At the same time, more specific instructions could not be expected, according to them, because of the general uncertainty in the economy and in the markets. Deputy Head of the Central Bank Alexei Zabotkin, in turn, noted that “the expediency of lowering the rate is less obvious than it was in the summer.”

/Media reports.