What is the Central Bank's key rate, in simple terms?

The Central Bank's Key Rate: An Important Financial Instrument in Simple Words

The Central Bank's key rate is one of the most discussed indicators in the economy, which can affect us even if we are not connected to the financial sector. Let's figure out what the key rate is, why it is needed and how it affects the economy and our everyday lives.

What is the key rate?

The key rate is the interest rate at which the Central Bank (CB) issues loans to commercial banks. For banks, this is essentially the cost of money that they receive from the CB. When banks borrow money from the Central Bank, they are obliged to return it with interest, and this interest is the key rate.

The CB sets the key rate and periodically revises it depending on the economic situation. This interest rate affects the cost of loans and deposits for commercial banks, and they, in turn, set their rates for everyone else - for us, ordinary citizens and entrepreneurs.

How does the key rate work?

To understand how the key rate works, imagine that banks, like ordinary customers, can take loans from the Central Bank. The lower the key rate, the cheaper the money is for banks, and the higher it is, the more expensive it is. Here's how it works:

When the key rate is low: It is profitable for banks to take money from the Central Bank, since the interest they pay is low. This allows them to offer loans to customers at lower rates. Available loans attract more people and companies, which increases their spending, stimulates the economy and supports businesses.

When the key rate is high: Loans become more expensive for banks, and therefore for their customers. People and companies begin to take out fewer loans, spend less, which slows down economic growth. The Central Bank uses this method when inflation (price growth) becomes too high and it is necessary to "cool" the economy so that prices stabilize.

Why does the Central Bank set the key rate?

The key rate is an instrument for regulating the economy. The Central Bank uses it to achieve two main goals:

Controlling inflation. If the prices of goods and services are growing too quickly (high inflation), the Central Bank can raise the key rate. This slows down the economy, reduces demand and helps stabilize prices.

Supporting the economy. When the economy slows down, the Central Bank can lower the key rate to stimulate growth. More accessible loans encourage companies and people to spend and invest, which supports economic development.

How does the key rate affect us?

The key rate does not affect us directly, but its changes can be felt in everyday life. Here is how it affects the financial aspects we face:

Loans and mortgages. When the key rate rises, banks raise rates on mortgages and consumer loans. This means that loans become more expensive, and vice versa, when the rate decreases, loans become cheaper.

Deposits. When the key rate is high, banks offer more favorable terms on deposits to attract funds. This provides an opportunity to earn on deposits, since interest rates on them also increase.

Prices for goods and services. An increase in the rate leads to a decrease in demand, which can stabilize or even reduce prices, especially for long-term consumer goods such as cars and real estate.

Example: how the key rate works during a crisis and during periods of growth

During economic growth. When the economy is growing steadily, the Central Bank can slightly increase the key rate to avoid overheating the economy. This helps control inflation and maintain price stability.

During a crisis. In an economic crisis or recession (for example, after a pandemic), the Central Bank often reduces the key rate to support businesses and the population. This makes loans more accessible and helps to restore the economy faster.

How often does the key rate change?

The Central Bank reviews the key rate regularly, depending on the current economic situation. In Russia, such meetings are usually held several times a year, but in conditions of economic instability, changes can occur more often. At each meeting, experts assess the state of the economy, the level of inflation, employment and other factors to decide whether to raise, lower or maintain the rate.

My position as the founder of Open Oil Market

For businesses, especially for companies engaged in commodity markets, like Open Oil Market, the key rate affects many things - from the cost of loans for the purchase of products to the ability of customers to pay for raw materials on time. With a low key rate, it is easier for businesses to attract funds for scaling and promptly solving financial problems. A high rate, on the contrary, complicates access to financing, which can slow down development.

For example, against the backdrop of a high key rate, many companies begin to postpone their investments, as loans become too expensive. This affects the demand for raw materials and final products, which ultimately slows down the entire economy.

Conclusion: Why is it worth monitoring the key rate?

The key rate of the Central Bank is an important indicator that reflects the state of the economy and can significantly affect our everyday finances. Monitoring rate changes is useful not only for entrepreneurs, but also for anyone planning large purchases, investments or deposits. It can serve as a guide for choosing the time to buy a home, invest in a business or open a deposit.

The Central Bank regulates the rate to maintain balance in the economy, and understanding its role can help make more informed financial decisions, especially in times of economic uncertainty.