What is the refinancing rate of the Bank of Russia and what is its size?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

What is the refinancing rate of the Bank of Russia? This is a question that worries economists, speculators, traders, and even representatives of the banking segment. It can be said that the rate acts in the format of monetary supply by the Central Bank of the Russian Federation of smaller financial institutions. The Central Bank provides loans to commercial financial institutions, which further lend to individuals (citizens of the country) and legal entities (companies, enterprises and organizations).

Refinancing rate in practice

In order to understand in detail what the refinancing rate of the Bank of Russia is, let's consider the mechanism of movement of cash flows. Commercial financial institutions borrow money from the Central Bank of the Russian Federation. For example, a million dollars. A year later, a small participant in the financial system must return the borrowed million dollars to the Central Bank of the Russian Federation, plus a percentage for its use. The current refinancing rate of the Bank of Russia will be the same percentage that a small commercial bank must pay, in addition to the principal debt. During a year,while a small financial institution uses the money of the Central Bank of the Russian Federation, it issues loans to the population and entrepreneurs at an interest rate that is an order of magnitude higher than the refinancing rate. The difference between the rate of the Central Bank of the Russian Federation and the percentage at which the commercial structure issues money is the profit of the latter. The population is credited, and all participants in the scheme receive their profits.

Why does the Central Bank of the Russian Federation not work directly with the citizens of the country?

The Central Bank of the Russian Federation does not work directly with individuals and legal entities just because the volume of the smallest financial transactions it has is millions, or even tens, hundreds of millions of dollars. Such amounts for entrepreneurs are simply unbearable. Small financial institutions act as a kind of intermediaries in the structure of lending to the population. For financial institutions, this is an opportunity to earn money. People, in turn, receive high-quality financial services due to an extensive system of offices and branches, the presence of structures with a large number of ATMs. Assume that the refinancing rate of the Bank of Russia will be equal to 10%. In this case, the population and entrepreneurs will receive loans at 18%. As a result, bankers will receive a net profit of 8% of the total payment for the use of funds.

Are they allowed to be issued to the population at the highest possible percentage?

Small financial institutions can take funds from the Central Bank at a low interest rate, and they can already transfer money to the population at the interest rate they want. Theoretically, suchthe possibility exists. However, one should also pay attention to competition, which has been more than tougher in the financial segment of Russia lately. Too high rates scare away customers. We have already roughly considered what the refinancing rate of the Bank of Russia is. It happens that it is only a few orders of magnitude lower than that which is available to an ordinary resident of the country. Moreover, the offers of most commercial structures do not differ much. There are exceptions on the market. For example, credit institutions engaged in consumer lending in large stores and lending through cards can set rates ranging from 30 to 70%. Finding customers is based on the psychology of people who are looking to buy something. It is they who, due to lack of financial literacy, agree to such an unprofitable partnership.

How is the refinancing rate calculated?

The refinancing rate of the Central Bank of Russia is determined taking into account two factors. This is the actual economic situation in the country and the inflation rate. As the inflation rate rises, so does the rate. When inflation rates decrease, it decreases. The situation can also be considered from the other side. When the refinancing rate of the Bank of Russia is low, the population has the opportunity to enjoy the benefits of low-cost loans. The rates on them during this period are significantly lowered, people are willing to cooperate, as they can buy everything they want for themselves with a minimum overpayment. Enterprises that can request financing for theiractivities. Attracting "cheap" money to the business allows you to produce large volumes of products with further receipt of high incomes after its sale.

How does the rate reflect the economic condition of the state?

The refinancing rate of the Central Bank of the Russian Federation acts as a kind of indicator of the state of the state economy and the standard of living of people. With low interest rates on loans, people have a large amount of money in their hands. There is a great demand for goods in connection with the possibilities of their purchase. As a result, after a while, goods begin to rise in price due to their shortage. The situation activates the growth of inflation. This is the process of depreciation of money, reflecting the ability to purchase different quantities of goods for the same amount. High inflation reflects the welfare of the people. The higher the indicator, the lower the welfare and the higher the level of discontent. The refinancing rates of the National Bank are constantly changing, as they are used to adjust the inflation rate. To stop the depreciation of money, the rate is raised, which leads to an increase in the cost of loans, to a reduction in demand for them and to a decrease in purchasing power.

Relationship between rates and taxation

In addition to lending, the refinancing rate of the Central Bank of the Russian Federation is actively used in the field of taxation. For example, it is worth mentioning the taxation of income from a deposit account, the interest on whichhigher than the refinancing rate by more than 5 percentage units. For example, if the refinancing rate is 10% and the deposit rate is 15%, then you do not need to pay tax. If the rate on the deposit is equal to 20%, then you will have to pay a tax to the state in the amount of 35% of the excess 5% on the deposit.

Relationship between the rate and the obligations of employers

Considering the question of what the refinancing rate of the Bank of Russia is, it is worth mentioning that it acts as a tool that is the main one for determining the compensation that is due to an employee in case of late payment of wages, with a delay in vacation pay or funds that need to be paid workers in the event of layoffs. In accordance with Russian law, the employer must pay the full amount of the debt, to which is added a monetary compensation calculated on the basis of the rate. It will be at least 1/300 of the refinancing rate for each day of delay. The indicator is used to calculate the pen alty interest, which is charged as a pen alty for non-payment of taxes and other fees.

Betting in Russia

The current situation in the world dictates its own rules. The acute economic crisis forced Russian banks to apply more and more often for material assistance to the Central Bank. Lending allows them to fully fulfill their obligations to customers. The provision of funds at interest to commercial structures is calledrefinancing. For the first time, the refinancing rate of the Bank of the Russian Federation appeared in 1993. For 10 years, it has been systematically changed. Russia has always sought to reduce this indicator as much as possible, down to the level of the leading countries. In particular, in Japan, the rate is 0.1%, which fully reflects the high level of development of the state. In Russia, the interest rate is 8.25%, which in terms of numerical values is fundamentally different from the US rate, in fact the situation in the countries also varies significantly.

What is the refinancing rate, in fact?

In theory, the refinancing rate in Russia should be the most powerful instrument of monetary policy. Its change was to be carried out in order to regulate the amount of money, the volume of which affects the entire country. You can notice that the tool is not used, since the last change in the rate took place in 2012. Not working in the field of monetary policy, the indicator leaves its mark on the fiscal. The regulation of the amount of funds in the country is carried out through emissions. In reality, the size of the indicator and the amount of funds are completely unrelated values. To say more, they are almost completely opposite and do not reflect each other. Many analysts see the current situation as a problem associated with the insufficient level of development of both the rate and reserve requirements. Even commercial structures borrow funds from the Central Bank of the Russian Federation, starting from the one-day REPO rate. According to this indicator, loans are issued to individuals and legal entitiespersons. It can be noted that the refinancing rate is nothing more than a formality, a declarative tool that does not have a good impact on the state's monetary policy.