The key rate is now 20%: what will change for the economy and citizens

The Bank of Russia's Board of Directors lowered the key rate from 21 to 20% per annum at a meeting on June 6. The last time a decision to lower the rate was made was almost three years ago - in September 2022, but then completely different figures were in use: the rate was lowered from 8 to 7.5%. After that, for almost three years, the Central Bank only made decisions to raise the rate or keep it at the same level.

And now the Central Bank is once again launching a cycle of easing the monetary policy (MP). What will be the consequences for the country's economy and its citizens? MK asked experts – economists and financial analysts – this question.

Mikhail Vasiliev, chief analyst of Sovcombank:

“The Bank of Russia unexpectedly for the market lowered the key rate by 100 bp, to 20%, and maintained a neutral signal.

The current inflation rate is decreasing, so the tight monetary conditions will remain even after the rate cut, since real interest rates are important for the Central Bank. In addition, the key rate affects the economy and inflation with a lag (3-6 quarters), so the Central Bank has probably started to soften monetary policy now to reduce the risks of overcooling of the economy.

There are still preconditions for a further slowdown in inflation: a cooling of lending against the backdrop of high interest rates, a strong ruble, and normalization of budget expenditures in the coming months.

At the same time, the Central Bank remains concerned about increased inflation expectations, a shortage in the labor market, and risks from external conditions (geopolitics, trade wars).

We believe that annual inflation peaked in March at 10.3% and will now decline to 5.6% by the end of the year.

Today's decision of the Central Bank will not have a significant impact on the ruble exchange rate. The key rate remains high and will continue to support the ruble. On the one hand, a high key rate contributes to the attractiveness of savings in rubles (deposits at 19-20% per annum). On the other hand, a high key rate cools consumer and investment demand and demand for imports (i.e. demand for currency).

Also in favor of the ruble are low demand for foreign currency for the purchase of imports and the sale of yuan from reserves within the framework of budget operations for 6.6 billion rubles per day. We expect that the ruble in the coming weeks will trade in the range of 10.6-11.5 per yuan, 76-83 per dollar and 87-95 per euro.

After the Central Bank's decision, deposit rates will be reduced by a comparable amount (-100 bp) in the coming weeks and will continue to gradually decrease over the coming months. According to the Central Bank, the average maximum deposit rate of the top 10 banks fell to 19.4% by the end of the third ten-day period of May - this is the minimum for six months. In general, it is profitable to open a deposit now. With official inflation at about 10%, deposit rates are now about 19%.

Spartak Sobolev, Head of Investment Strategies Department, Alfa-Forex:

"The Bank of Russia explained the decision to reduce the key rate to 20% by the presence of signs of slowing inflationary pressure. According to their estimate, at the beginning of summer, the annual price growth was 9.8%, while the general inflationary expectations of the population remain high, which forces the regulator to maintain the severity of monetary conditions further in order to achieve the target inflation level of 4% next year.

A number of commercial banks have begun to gradually reduce deposit rates in advance, and loan rates may also likely be adjusted downwards. The Central Bank sees the economy gradually moving towards a balanced growth trajectory, and the strengthening of the ruble in the first half of the year is contributing to the slowdown in the growth of prices for non-food products. The Russian currency rate on the market is maintaining the boundaries of the medium-term growth trend, slowing it down in the weekly range of 78-84 rubles per dollar, 88-94 rubles per euro, and 10.80-11.40 per yuan."

Vasily Girya, General Director of GIS Mining:

"The Bank of Russia has reduced the key rate to 20% per annum from 21%. This happened for the first time in almost three years. Interestingly, the trajectory of the interbank market in the last two days has signaled a softening: the ruble exchange rate has been falling, as if banks were quickly taking into account the changing circumstances.

Most likely, the repeated signals from inflation, which is falling both weekly and year-on-year, became the decisive argument for the Board of Directors of the Central Bank, which decided to reduce the rate.

Banks have already started actively reducing deposit rates several weeks ago. The most favorable rate on deposits in rubles in the top 10 Russian banks is now for 3 months. Interest rates on loans are also decreasing, but not quickly. In the coming weeks, it will be clearer how the banking sector will react to the long-awaited easing of monetary policy.

At the same time, the reduction of the key rate is a big plus for the real sector due to the optimization of credit conditions.

The US dollar on the over-the-counter market soared to 79.33 rubles and may rise to 80 rubles, the euro strengthened to 90.60 rubles. In the coming days, the dollar will continue to consolidate at the 80 ruble mark."

Vladimir Chernov, analyst at Freedom Finance Global:

"On Friday, the Bank of Russia lowered the key rate for the first time since September 2022: from 21% to 20%. The decision gives a clear signal about the beginning of the monetary policy easing cycle, which creates conditions for further reduction of deposit rates in banks.

However, even before the official decision of the Central Bank, the largest players in the banking sector began to reduce interest rates on deposits ahead of schedule. In early June, the top ten domestic banks reduced rates on short- and medium-term deposits by 0.3–1 percentage points. By the third ten-day period of May, the average maximum rate on deposits in the top ten banks fell to 19.39% per annum, 0.13 percentage points lower than in the previous ten-day period, and already lower than the key rate. Therefore, further reduction will be limited, since banks have already partially factored it into their monetary policy.

We believe that after today's decision by the Central Bank, the average deposit rate in the top 10 banks may fall to 19% per annum. However, expectations of a further reduction in the "key" will lead to banks reducing deposit interest rates several more times as the Bank of Russia meeting approaches in July and will lower them to 18% per annum."