National Bank of Bashkortostan explained why key rate is being reduced slowly

Representatives of the real economy often complain that the Central Bank is keeping the key rate too high. Businesses desperately need accessible borrowing, without which they cannot develop normally. Previously, the Russian Ministry of Economic Development warned that maintaining a tight monetary policy would be one of the main risks to implementing the baseline economic development forecast in the near future.

However, monetary authorities are rightly concerned that a rapid reduction would lead to results that are opposite to those expected. Marat Kashapov, Governor of the National Bank of Bashkortostan, explains:

"Currently, inflation is far from the target of 4%. Therefore, a sharp reduction in the target rate is a risky move. Why? Let's take a closer look. Loans will become cheaper, which will increase demand for both production resources and consumer goods and services. This means there will be more buyers with money, but not more goods and services, since businesses can't always quickly adapt to increased demand. This is especially true now, when labor is in short supply. This will lead to a sharp rise in prices for literally everything.

World history has seen recent examples of sharp key rate cuts amid high inflation. In Turkey, inflation was 10% in 2021. Their regulator lowered the key rate from 24% to 10%. In two years, inflation accelerated to 85%. It was stopped by raising the key rate to 50%.

Author: Elina Akhmetova