What is the Central Bank rate, what is it for? We often hear about this indicator, but not everyone understands its significance. The article explains in clear language the meaning of the refinancing percentage of the Central Bank of the Russian Federation.

Quite simply

The refinancing rate of the Central Bank of the Russian Federation is the interest at which commercial banks and financial organizations borrow money from the Central Bank of the country. The Central Bank acts as a creditor of the entire banking system. The indicator is calculated in annual percentages.

In a simple example, the borrowing process looks like this:

A commercial bank receives 100,000,000 rubles from the Central Bank at 10.5% per annum. After a year, he must repay the amount of debt and interest in the amount of 10,500,000 rubles. Total 110,500,000 rubles.

Receiving money at the refinancing rate, banks, in turn, issue it to the population and business in the form of loans, consumer loans, and mortgage loans.

It is clear why banks issue money at higher interest rates than the Central Bank rate - the difference is their income.

In the end, everyone is happy: the population and business receive loans, banks and the Central Bank make a profit.

The question may arise why the Central Bank of the Russian Federation does not issue loans to borrowers directly? The answer is simple: the regulator works only with large structures, issuing borrowed money in tranches of tens and hundreds of millions of dollars.

Banks act as intermediaries in this scheme, having branches and offices in every locality and issuing loans for different amounts, from several thousand rubles.

How is the Central Bank indicator determined?

The Central Bank sets the refinancing percentage taking into account the current situation in the economy, focusing on the inflation rate. The higher the inflation, the higher the Central Bank rate, and vice versa.

How does this affect ordinary borrowers? It's simple: if the refinancing rate is low, then loans for the population become available: banks reduce their interest rates, receiving cheaper money from the Central Bank.

As a result, private borrowers and business representatives strive to obtain favorable loans. Consumption is growing, and profits for manufacturers and retail chains are increasing. It would seem that everything is fine!

But this process also has a downside: if people have a lot of cheap money in their hands, then they are ready to buy a lot. Goods begin to rise in price, sellers raise prices, trying to maximize their income. And inflation and money depreciation begin to rise.

High inflation leads to a decrease in the well-being of the population and an increase in discontent. And this leads to threats to power and political changes. Therefore, the refinancing percentage of the Central Bank of Russia is a kind of instrument that regulates inflation.

To reduce it, the Central Bank raises the rate. Loans become more expensive, borrowers refuse them and consumption levels decline. Following this, inflation decreases.

Central Bank rates and bank interest rates

In conclusion, we will provide background information on the rates of the Central Bank of the Russian Federation and examples of some loan offers relevant in 2016.

Table 1. How the refinancing rate changed in the period from 2005 to 2016

date	Bid (%)
14.06.2016 –	10.50
01.01.2016 – 13.06.2016	11,00
14.09.2012 – 31.12.2015	8,25
03.05.2011 – 25.12.2011	8,25
30.04.2010 – 31.05.2010	8,00
25.11.2009 – 27.12.2009	9,00
12.11.2008 – 30.11.2008	12
29.01.2007 – 18.06.2007	10.5
15.06.2004 – 25.12.2005	13

Table 2. Tariffs of commercial banks for consumer loans in 2016.

Bank	Tariff (%)	Amount (rub.)
Post Bank	From 19.9	Up to 1,000,000
CitiBank	From 15	Up to 2,000,000
Raiffeisenbank	From 17	Up to 2,000,000
VTB 24	From 17	Up to 3,000,000

Where is the refinancing rate used?

The Central Bank of the Russian Federation does not set rates every day. Usually the indicator is valid for several months before the next change.

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Banks and the state rely on the refinancing percentage in matters of taxation and calculations of the profitability of bank deposits. Some examples:

• Taxes are levied if income on ruble deposits exceeds 5% of the rate of the Central Bank of the Russian Federation. Today the rate is 10.5%. Thus, the owner of the deposit who received an income of over 15.5% per annum will pay tax. For amounts exceeding this value, you will have to pay income tax in the amount of 35%.

• The Tax Service collects penalties and fines on the amount of violations at a percentage of the Central Bank. Private taxpayers and business representatives who have overdue the date of obligatory payment of taxes and fees will pay a penalty for each day of delay at the Central Bank rate.

The refinancing rate (official discount rate, ODR) is the main discount rate at which the Bank of Russia issues credit resources to commercial banks. Important: the higher the value of this rate, the more interest it attracts among foreign investors. This is logical, since, thanks to the high interest rate, banks have the opportunity to increase interest on deposits and, accordingly, it becomes profitable to invest free cash in them. However, there is also the other side of the coin - an increase in the refinancing rate also leads to an increase in the cost of credit resources in the country, as a result of which the small and medium-sized business lending segment suffers. The consequences of an increase in the refinancing rate may be unemployment and a decrease in free funds in circulation (intensification of deflationary processes). Thus, an increase in the basic discount rate has a dual interpretation, namely:

1) On the one hand, this fact has a positive effect on the national currency and leads to an increase in its exchange rate. Foreign investors are showing increased demand for the national currency at .

2) On the other hand, there is an increase in the unemployment rate, which has a detrimental effect on the national economy.

A decrease in the refinancing rate is characterized by the opposite consequences - foreign investors begin to cash out deposits, after which they actively sell currency on the Forex market. As a result, such events lead to a decrease in the exchange rate of the national currency. At the same time, thanks to low interest rates on bank loans, small and medium-sized businesses are stimulated, unemployment is reduced and cash in circulation increases (increased inflation processes).

The refinancing rate of the Central Bank of the Russian Federation is the rate on loans provided by the Central Bank and credit institutions. At this interest rate, loans are provided to commercial banks as refinancing.

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Before finding out what a refinancing rate is, you need to understand what a loan refinancing is.
Refinancing by the Central Bank is the issuance of loans and credits by the Bank of Russia to credit institutions operating in Russia. This definition is given in Art. 40 of the Law “On the Central Bank of the Russian Federation” dated July 10, 2002 No. 86-FZ.
Refinancing itself, as a banking term, is the repayment by the borrower of an old, existing loan at the expense of a new one. In this case, the borrower pursues the following goals:

• Repay an existing loan with a higher interest rate with a new loan with more favorable credit conditions, in particular with a low interest rate;
• Obtaining a new loan in order to extend the total loan term.

Why do you need a refinancing rate?

The refinancing rate is the most important instrument of monetary policy of the Central Banks of all countries. Its change leads to changes in interest rates on all loans in the country, changes in the volume of financial transactions in the market and the attractiveness of the national currency.
It is worth highlighting three areas of application of the refinancing rate of the Central Bank of the Russian Federation:

• The interest rate at which the Bank of Russia issues loans to commercial banks in our country. Previously, loans to banks were issued at a refinancing rate for a period of 1 day. This type of loan was called “overnight”.

Currently, the Central Bank of the Russian Federation does not lend to commercial banks using the refinancing rate. The interest rate on such loans is calculated by the Central Bank of the Russian Federation using other banking instruments and ranges from 5.5 to 6.5%. The longer the loan term to a commercial bank, the lower the interest rate.

For permanent operations, where the lending term ranges from 1 to 1 week, the lending rate of the Central Bank of the Russian Federation is 9 - 9.5%, and for open market operations, with a period of 1 week to 1 year - 8 - 8.25%, that is, within the key rate and the refinancing rate.

• The value of the Central Bank of the Russian Federation rate characterizes the economic situation in the country and reflects the efficiency of economic processes.

First of all, the value of the refinancing rate affects changes in interest rates on deposits. You can use the deposit calculator on bank websites to find out how the final deposit amount will change with a change in the refinancing rate in one direction or another.

Banks attract funds using interest rates for household deposits that are slightly lower than the established refinancing rate, and issue funds at higher rates. This is the direct profit of the banks.
A rate reduction leads to stimulation of the country's economy as a whole. If the Central Bank of the Russian Federation reduces the refinancing rate, for example, to 2%, then a mortgage loan will most likely be available at a rate of 4–5% per annum. As a result, there will be a “boom” in the real estate market. But this will lead to an increase in inflation.

If the Central Bank of the Russian Federation increases the refinancing rate, this will slow down the development of the country’s economy. Loans will become unavailable to many individuals and legal entities. This will lead to a decline in production, trade and other areas of business.
But, in the history of our country there were moments when an increase in the refinancing rate led to an increase in inflation, and vice versa. It is worth recalling the history of our country, when from September 1993 to April 1994, the refinancing rate was equal to 210% per annum, and the inflation rate was 215.4%. But this was most likely caused by the instability of the political situation in the country.

• The refinancing rate values ​​are used to calculate fines and penalties for various late payments to the country’s budgets. This applies to both legal entities and individuals. This value is also used when providing compensation payments to support small businesses, to provide an investment tax credit, and more.

If an enterprise or individual entrepreneur has debts on taxes and fees, then fines and penalties are charged for each day of delay, based on the refinancing rate. This value is considered optimal for calculating penalties.
For example, for late tax payments, “a fine is charged in the amount of 1/300 of the refinancing rate of the Central Bank of the Russian Federation for each day of delay.”

History of changes in the refinancing rate

The decision to change the refinancing rate is made by the country's Central Bank. Today the rate is 8.25%, and it has not changed for the last few years, namely since September 2012.
If we take the time period from the beginning of the 2000s to the present day, then the minimum value of the refinancing rate was from June 2010 to February 2011. It was equal to 7.75%.

The highest value – 55% – was noted in the early 2000s. But during this period the country’s economy was quite unstable. Over the past 5 years, the refinancing rate has remained at around 8%, which indicates the stability of the financial market of our country.

Since the fall of last year, 2013, the Bank of Russia introduced such a concept as the key rate. Now it is of paramount importance, and by the beginning of 2016 they plan to “pull up” the key rate to the level of the refinancing rate. For now, the refinancing rate of the Central Bank of the Russian Federation will fade into the background.

Until June 2014, the key rate was 7.5%, today it is 8%.

The refinancing rate is a secondary or reference instrument of the Central Bank of Russia. This is essentially the value based on which the Central Bank lends to commercial banks, and they, in turn, issue loans to businesses and the public. This rate is an indicator of the real value of money for the country's economy. In addition, the discount rate, as an additional instrument of monetary policy, also affects other processes in the country’s economy.

What is the refinancing rate of the Central Bank of Russia and its functions

In simple words, the application of the refinancing rate can be described as follows: a commercial bank takes out a loan from the Central Bank at 10% per annum (for example) for a year. During this period, it provides loans to its clients at 18% per annum. This difference is the commercial bank's profit.

Banks and other financial organizations borrow funds from the Central Bank in order to:

• Pay off an existing loan with a higher rate.
• Receive additional capital to extend the total loan term

It is to such loans (for refinancing) that this rate is applied.

The refinancing rate of the Central Bank of the Russian Federation is applied for:

• Determination of rates applied for lending to banks and other credit organizations. Consequently, the amount of refinancing affects the level of lending rates for clients of banks and credit institutions.
• Reflections on the effectiveness of economic processes. Its meaning characterizes the general situation in the country.
• Setting the level of interest on deposits. Commercial banks place clients' funds at interest rates that are slightly lower than the refinancing rate, so they make a profit.
• Determination of the amount of personal income tax on deposits. The refinancing indicator is involved in calculating the non-taxable level of return on deposits.
• Determination of the amount of fines and penalties for violation of payment of taxes and fees. The Tax Code determines that penalties are calculated at 1/300 of this rate.
• Determining the amount of interest for the use of other people's funds, the cost of loan agreements without specifying interest, etc. For the use of other people's funds, a percentage equal to 2/3 of the refinancing rate is applied, for loan agreements - 1/1.
• Calculation of the amount of financial liability for delays in salaries and other payments to employees - 1/300 of the rate.
• Guidance when calculating various compensation payments that support entrepreneurship, providing investment loans, etc.

Thus, reducing the refinancing rate leads to stimulation of the economy. For example, the situation in the mortgage market will be clear in this case. When the refinancing rate decreases, the interest on mortgage loans also decreases. That is, such loans are becoming more accessible, as a result of which the real estate market is reviving. Hence the increase in construction volumes, and, consequently, the growth of jobs and a number of other positive aspects. At the same time, there is an increase in the level of inflation, which, in moderate amounts, may also indicate the growth of the country’s economy and an increase in the well-being of the population.

Raising the rate, in turn, will slow down economic development.

These are classic development options. In practice, due to the influence of various negative factors (domestic, foreign policy and other factors), there may be other options for the relationship between the rate level and inflation.

What affects the refinancing rate and its meaning

The refinancing rate is determined by the economic situation in the country and the level of inflation. When inflation increases, the regulator increases the value, and when inflation decreases, it lowers it.

Low interest rates make loans available to households and businesses. Citizens can afford more benefits, and enterprises, organizations and entrepreneurs can develop their businesses, modernize and expand production.

People can afford to buy more goods, that is, supply increases. This leads to higher prices and higher inflation.

Too much inflation leads to a deterioration in people's well-being. In this situation, the regulator again applies the refinancing rate. Its decline will now restrain lending and, accordingly, purchasing power and production. What will slow down the growth of inflation.

Today, the refinancing rate is of a reference nature and is not a direct instrument of monetary policy. The main instrument since 2013 has been the key rate of the Central Bank of Russia, through which direct regulation occurs. The refinancing rate today is 8.25%. It has not changed since September 2012. Over the past 15 years, the average rate is 7.75%.

The Central Bank of Russia plans to bring the level of the key rate, which is currently equal to 11.5%, to the level of the refinancing rate.

Today I propose to talk about a general economic topic: what might an increase in the discount rate lead to? the country's central bank (Central Bank of the Russian Federation, NBU, etc.). Not long ago, the Central Bank of the Russian Federation increased the discount rate from 7.5% to 8%, the NBU - from 9.5% to 12.5%, similar increases occurred in some other CIS countries. In this post, I will look at why central banks have resorted to such actions, and how they may affect ordinary people.

So, discount rate(or refinancing rate) is one of the central bank’s monetary policy instruments, which is intended primarily to regulate the cost of credit resources. Theoretically, this is the rate at which the country’s central bank can sell monetary resources to commercial banks, but in practice, not every commercial bank can receive a central bank loan at this rate. In addition, many other points are tied to this figure, for example, fines and penalties, which are calculated “in the amount of the discount rate”, “in the amount of the double discount rate”, etc.

It should be noted that in developed countries the discount rate is less than 1% (in the UK - 0.5%, in the USA - 0.25%, in the Eurozone - 0.15%, and in Japan - generally 0.1%). This indicator can be considered as one of the key indicators of the state of the country's economy.

The lower the discount rate, the more stable and stronger the country's economy. Thus, an increase in the already high interest rate indicates a worsening economic situation.

Then many, I think, may have a reasonable question: why raise it at all? Everything is very simple: an increase in the Central Bank discount rate is not a cause, but a consequence of a worsening economic situation, and its increase is used as one of the tools to ensure that the situation stabilizes in the future. How does this happen?

Let's build a logical chain: In the country, prices begin to rise with constant or falling incomes - the central bank increases the interest rate - resources become more expensive for commercial banks - banks increase loan rates - lending volumes decrease - the purchasing power of the population decreases - demand for goods and services decreases - stops or price growth slows down.

Thus, the discount rate acts as one of the tools to curb inflation processes. The country's economic growth is slowing down, but at the same time, inflation is also slowing down.

The entire mechanism of operation of this regulator can be briefly represented in the following diagram:

These are precisely the goals that central banks appear to be pursuing now. And now we will look at what the increase in the discount rate of the Central Bank of the Russian Federation and the NBU will lead to in the short term, that is, already now.

1. Raising interest rates on loans and deposits. Actually, this is the consequence that should become a priority, based on the theoretical purpose of this regulator. But practice shows that, for example, the Ukrainian monetary market does not always respond to the use of this regulator properly.

If we look at the history of changes in the NBU discount rate over the last decade, we will see the absence of a single trend: this figure ranged from 6.5% to 12.5%. Moreover, an increase in the discount rate did not always lead to an increase in rates on deposits and loans, and a decrease, accordingly, did not always lead to a decrease. The conditions for issuing loans and accepting deposits were more adjusted to other economic and political processes in the country and specifically in its banking system. Therefore, we can assume that an increase in the NBU discount rate, if it leads to an increase in rates in commercial banks, will only be insignificant.

In Russia the situation is different. Since 2000, the refinancing rate has constantly fallen from 55% and by 2011 stabilized at around 8%, with further fluctuations being insignificant. Here the economy is more developed and stable, therefore it is more subject to its classical laws. Therefore, bank rates began to rise even in anticipation of an increase in the discount rate. Thus, in my opinion, we can expect an increase in rates on deposits and loans by an average of 1-3 points. For loans, accordingly, this growth will be more noticeable.

In this case, these are only my own assumptions, which may or may not be justified.

2. Increase in fines and penalties in monetary terms. Now everything that depended on the discount rate will rise in price, and this, first of all, is all kinds of penalties provided for in contracts, for example, a fine for.

Therefore, look up all your contracts and find clauses in them that rely on the discount rate in your calculations. Now, in case of non-compliance with the terms of contracts, incl. existing ones will have to pay more. Especially considering that penalties are assessed for each day of failure to fulfill obligations under the contract.

3. Increase in payments on loans with floating rates. Some banks operate lending programs with floating rates, under which the current loan rate depends on the Central Bank discount rate. Anyone who took out such a loan with the hope of a reduction in the discount rate can say that they haven’t guessed yet - it has increased, which means that the rate on an existing loan will also increase.

However, as practice shows, such loans were issued very rarely, in general they were probably less than 1%, so most borrowers will not be affected by an increase in the discount rate in this regard.

4. Outflow of investments. The more expensive credit resources are in a country, the less attractive that country is to investors. Accordingly, an increase in the refinancing rate can lead to a decrease in the volume of foreign investment in the economy and even become a reason for the withdrawal of already invested capital. Time will tell how this will happen in practice.

5. Devaluation of the national currency. A decrease in investment attractiveness, a decrease in production rates, and economic growth caused by an increase in the discount rate, in turn, can lead to the devaluation of the national currency. Especially in the case when it is used, the price of a currency depends on supply and demand in the market. Therefore, we can expect some weakening of the ruble, hryvnia and other currencies, but whether it will be final depends on many other factors.

Well, time will tell what the increase in the discount rate will lead to in the long term. Of course, I would like this regulator to work and give the effect that the Central Banks expect from it.

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