The most common concepts of the country's financial system are the refinancing rate and the key rate. They are the main instruments used in the monetary policy of the state. The central bank uses them in the formation of its credit policy, refinancing of state and commercial banking institutions, as well as for other monetary transactions. Let's see how the refinancing rate differs from the key rate.
The essence of the financial instruments under consideration
In order to understand how these financial instruments differ, it is necessary to understand what they are.
The refinancing rate (account rate) from its introduction in 1992 until the second half of 2013 was the main financial instrument of the country. This is a measure that characterizes the value of loans provided by the Central Bank, it is expressed in percentages in the annual respect.
By increasing or decreasing the value of this indicator, the Central Bank could indirectly regulate the amount of interest on loans, deposits and inter bank transactions. Beginning in 2003, the indicator began to determine the ceiling (maximum value) of interest on liquidity operations in the money market, the rates of one-day loans "overnight" were brought to its level.
In addition, several additional functions were tied to the size of the interest rate:
- setting the penalty for delaying payment for housing and housing and utilities;
- Determining the amount of fines (for violation of the terms of the employer's payment of wages and other mandatory payments to employees, for violation of one of the parties to the contract of their financial obligations);
- calculating the size of the forfeiture in the case when the developer violates the terms set in the agreement of the transfer of housing (apartment or house) to the share party of construction.
- Accruals are made on the basis of 1/300, 1/360 or 1/150 part (in different situations) the interest rate of refinancing for each calendar day of the recorded violation.
Also, the refinancing rate was used in fiscal policy, that is, to determine the value of some taxes and penalties for their non-payment. In particular, it was used in calculations:
- Income on bank deposits subject to NDFL taxation;
- income from material benefit if there are savings on interest on loans;
- the amount of corporate income tax, including interest expense and their allowable interval on debt obligations;
penalty for violation of fees and taxes.
The key rate is the percentage at which the Central Bank provides and withdraws liquidity for up to one week through the repo auction. These auctions are characterized by the fact that they are traded in securities, while the condition is the obligation to sell them back at the price specified in the contract repo. Therefore, such a transaction is an indirect loan for a short period of time on the collateral of bills, bonds or depository receipts. This mechanism allows the Central Bank to receive income as a result of the difference in prices between sale and purchase at reduced risks, as the securities temporarily become the property of the lender at the time of the loan.Key rate and inflation dynamics (2015-2017)
The main reasons for setting the key rate were increased control over the rate of inflation and the increase in the level of investment attractiveness of the economy.
It was introduced in September 2013 and has since become the main policy tool of the Central Bank of the USA Federation. With its help, the Central Bank of USA can influence short-term operations (within 1-7 days).
In addition, the Bank of Russia introduced the so-called "interest rate corridor", with a set width of 2 percentage points. Its boundaries are formed by transactions using fixed interest rates to provide liquidity (top) and its withdrawal (lower).
The dynamic cost of borrowing is tied to the size of the key rate. Accordingly, by adjusting the size of the rate, the Bank of Russia can influence the cost of loans and deposits for the population and business. This, in turn, affects the economy's cash supply, bank liquidity, economic growth rate and inflation rate.
In short, it looks like this. If the economy is very warmed up, consumer demand is high and the population is actively credited, then there is an increase in the prices of goods and the unwinding of the flywheel of inflation. In this case, the key rate is raised, which entails an increase in the cost of credit, a decrease in the purchasing power of residents and a slowdown in inflation.
If the economy is in a state of stagnation, business activity is low, there is deflation, then additional stimulation of the economy by infusion of additional credit money is required.
This is facilitated by the rate cut. This approach is called "inflation targeting" and the concept of a key rate has been introduced to implement it.
At the same time, due to the different vision of the economic situation and the set goals, there are often disagreements between the Ministry of Economic Development and Trade and the Central Bank.
What are the differences between interest rates and key rates?
Both financial policy instruments under consideration are governed by the Bank of Russia. These are the two main ways of regulating monetary relations in the state, applied at different times. It should be immediately noted that today the key rate has come to the fore, the accounting now performs a supporting function.
The key rate and refinancing rates differ:
The interest rate was the main rate until 2013, and the key rate was from that period;
The refinancing rate pointed to the maximum interest on the central bank's banking operations, and the key one was focused on the middle of the Central Bank's interest corridor for withdrawal and liquidity;
The refinancing rate reflected the value of overnight loans, and the key was short-term repo auctions with a seven-day horizon;
regarding additional functions: the interest rate is used to address some fiscal policy issues, as well as to account for penalties, penalties and penalties, and the key rate is to calculate the maximum interest on debt obligations.
Between September 2013 and January 1, 2016, both indicators functioned in parallel, their rates were set separately and differed. This in 2014-2015, in the conditions of the collapse of oil prices, led to distortions, which led to the fact that it became more profitable for debtors to pay a penalty for arrears than to issue a new loan to repay their debt obligations.
After that, the value of the refinancing rate is not self-affirmed, but equates to the size of the key rate, and the tool itself is used only to perform its additional functions. Over the past year and a half, the value of both indicators has steadily decreased and today is set at 9%.
The value of the key rate in Russia and other emerging economies (Turkey, Brazil, South Africa) is important for foreign portfolio investors (investment funds) who are looking for a place to invest their capital profitably. Such attachments are called Carry Trade.
The ordinary USA investor needs to have the dynamics of the value of this criterion, as it affects the yield of bonds of the FCO, as well as the exchange rate of foreign currencies.
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