Why the central bank changes the key rate and how it affects us
Situation analysis and forecasts ahead of the march 20 meeting
Over the past five years, the key rate of the Central Bank of Russia has undergone significant changes — from an unprecedented low of 4.25% to a peak of 21%. At the February meeting, the regulator again lowered the rate, reducing it from 16% to 15.5%, marking the sixth consecutive downward move. The next meeting of the Bank of Russia Board of Directors on the key rate is scheduled for March 20. Ahead of the next Central Bank meeting, Realnoe Vremya, in partnership with Avers Bank, offers a closer look at the essence of the key rate and its impact on the country's economy and ordinary citizens.
What is the key rate?
The key rate is the interest rate at which the Central Bank of Russia provides loans to commercial banks or accepts funds from them. This indicator plays an important role in regulating the economy, influencing the cost of loans and deposits for businesses and the population.
Simply put, the key rate is the minimum price of money for banks: if the rate is 15.5%, it means commercial banks can borrow from the Central Bank at this rate, while they issue loans to clients at a higher percentage. The difference between the rates is the banks' profit.
For ordinary people, the rate serves as a benchmark. A high key rate means expensive loans, so it is unprofitable to borrow money without an urgent need. However, deposits become more attractive during this time, as banks offer high interest rates. When the key rate decreases, the yield on deposits diminishes, so it is important to choose the right moment to open a deposit to maximize earnings.
What the key rate affects
The key rate is the Central Bank's main tool for managing the economy. It determines the cost of money and influences many areas: inflation, lending, investment, and the ruble exchange rate.
- Economy.
When the rate increases, loans become more expensive; people and businesses reduce borrowing and spend less. This leads to decreased demand and a slowdown in economic activity — the economy is “cooled down.” When the rate decreases, money becomes cheaper, loans become more affordable, consumers and companies borrow and spend more actively, stimulating economic growth but potentially accelerating inflation.
- Currency exchange rate.
An increase in the rate makes the ruble more attractive to investors — the currency strengthens. When the rate decreases, investments in foreign assets become more profitable, and the ruble may weaken.
- Deposits and loans.
A high rate means profitable interest on deposits but expensive loans. When rates decrease, deposit yields fall, but loans become more accessible.
- Stock market.
Bond yields depend on the key rate: when it rises, bonds become cheaper; when it falls, they become more expensive. Stocks also react — with a high rate, companies receive fewer loans and generate less profit, reducing investor interest; with a low rate, stocks become more attractive.
- Impact on citizens' lives.
When the rate increases, loans and mortgages become more expensive, making large purchases harder, but it is more profitable to keep money in deposits. When the rate decreases, loans become cheaper, deposit rates fall, and depositors seek new investment opportunities. Ultimately, a rate increase reduces consumer spending, while a decrease increases it.
Key rate forecast
The size of the key rate is set by the Board of Directors of the country's Central Bank. Decisions to raise or lower it are made based on a thorough analysis of the current economic situation and development forecasts. In Russia, board meetings are held at least once a month, allowing the key rate to be changed up to 12 times a year.
The Central Bank of Russia targets an inflation rate of 4% per year. If inflation grows faster, the Central Bank raises the key rate to reduce price pressure. If inflation slows down, the rate is lowered to stimulate economic growth.
At the last meeting, on February 13, the Bank of Russia Board of Directors decided to lower the key rate by 50 basis points, setting it at 15.5% per annum. The next meeting is scheduled for March 20.
— The most likely outcome is another slight reduction in the key rate — by 0.5 or 1.0 percentage point. Over the course of the year, we can expect a continued gradual decrease in the key rate, which, under favorable conditions, could reach 10–12 percent per annum by the end of the year, — Igor Kokh, Professor at the Department of Financial Markets and Financial Institutions of the Institute of Management, Economics and Finance at KFU, shared his expectations with a Realnoe Vremya correspondent.
Meanwhile, the medium-term forecast for 2026, updated by the Bank of Russia after the February 13 meeting, stands at 13.5–14.5%.
— In our updated forecast, ensuring a sustainable return of inflation to the target will require a slightly higher rate next year, at 8–9%. This is necessary to ensure a truly sustainable return of inflation to the target amid elevated inflation expectations. Over the past four years, when the inflation target was not met due to pro-inflationary shocks, inflation expectations have become entrenched at elevated levels. Their reduction will occur quite slowly, including due to the increased pace of indexation of regulated services and tariffs in the coming years. All this requires, all else being equal, a smoother trajectory for reducing the key rate. This will allow us to bring sustainable inflation back to 4% in the second half of the year, and the economy back to balanced growth, — said Bank of Russia Governor Elvira Nabiullina following the regulator's last board meeting.
The next Central Bank meeting on March 20 will allow us to assess whether the trend towards rate reduction will continue or whether the regulator will change course based on current economic data.