3
$\begingroup$

The Russian Central Bank raised their key interest rate to 20% in the midst of economic sanctions in response to the invasion of Ukraine. In the United States, the key interest rate, as far as I understand, is the interest rate at which banks borrow from the Federal Reserve to keep their reserves at the required level. But I've read that there are two key interest rates, this discount rate and the federal funds rate. I see the term "key interest rate" used so loosely in news articles and often interchangeably with other rates; it's confusing.

  • What do they mean when they talk about the Russian Central Bank's "key interest rate"? What rate is this exactly?
  • And how does raising it so high protect the ruble or the Russian economy?
$\endgroup$

1 Answer 1

2
$\begingroup$

What do they mean when they talk about the Russian Central Bank's "key interest rate"? What rate is this exactly?

It’s the Russia’s central bank policy rate so the rate at which private banks can borrow short term loans.

And how does raising it so high protect the ruble or the Russian economy?

Exchange rate is inversely related to country’s interest rate. High interest rate, ceteris paribus, strengthens exchange rate and vice versa.

This is because high interest rates encourages people to park their money in Russian banks. In order to do that they have to get rubbles first. Increase in demand for rubble, ceteris paribus, strengthens the rubble. Although people can't save at central bank, the rate central bank sets affects interest rates bank set for their deposits and loans. These furthermore affect all other interest rates in the economy.

In addition, high interest rate, ceteris paribus, is also inversely related to price level so it helps fight inflation.

$\endgroup$
3
  • $\begingroup$ How does a bank having to pay more interest on their short-term borrowing encourage people with money in that bank to keep it in there? $\endgroup$
    – kidcoder
    Mar 1 at 19:37
  • $\begingroup$ @kidcoderSAVEUKRAINE because due to competition the short term interest rate central bank sets will affect short therm deposit rate. Banks can get money either from central bank or depositors. If central bank charges 20% then they can offer anyone who deposits 19% interest rate and still be better off than borrowing from central bank. Furthermore, all interest rates in an economy are interconnected because all debts are more or less substitutes for each other. Any firm can issue bonds or get loan from a bank, if bank loans go for 22% (suppose there is 2% extra margin on what they borrow from $\endgroup$
    – 1muflon1
    Mar 1 at 19:43
  • $\begingroup$ Russian central bank) then on bond market firm bonds will be affected, because firms have choices between the instruments so if interest rates would be significantly different (putting aside difference that arises from fact that some instrument can have different risk etc than other), then people would suddenly start to prefer one of the instruments to the point that change in demand would force interest rates to equalize $\endgroup$
    – 1muflon1
    Mar 1 at 19:47

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.