Russia raises its key policy rate
On 13 September 2024 the Bank of Russia raised its key rate to 19%, even as other major central banks were cutting. The increase is feeding through to mortgage rates, which have climbed above 21%.
Russia raises its key policy rate
But while all the developed countries of the West, along with Japan and China, are cutting their key rates to stimulate their economies, on 13 September this year the Central Bank of Russia did the opposite, raising its base rate to 19% a year. This is the second consecutive increase; in July the rate was raised by 2 points, from 16% to 18%. Russia’s key rate is now among the highest in the world. For comparison, on 18 September 2024 the United States Federal Reserve, which acts as the country’s central bank, cut its base interest rate by 50 basis points, to 4.75–5.25% a year. According to the Fed’s statement, it cut in order to achieve maximum employment and to bring inflation down to 2% and then anchor it there. Although actual inflation in the United States stands at 18%, the Fed still went ahead with the cut, because expensive money weighs on industrial production and consumption across the country.
Russia raises its key policy rate
Overall industrial production figures in the United States are not especially good, and consumption is sluggish. The European Central Bank (ECB) also cut its key rate in the eurozone, from 4.5% to 4.25% a year, on 6 June this year, slightly ahead of the United States. Japan’s key rate currently stands at 0.25%. The Bank of England likewise cut its key rate from 5.25% to 5% a year on 1 August this year. After the Central Bank of Russia’s increase, mortgage rates in the country now start at 21% and above. A higher key rate inevitably pushes up every credit rate in the country, including the market mortgage rate. According to Dom.RF (Russia’s financial development institution for housing), mortgage issuance in Russia fell by 56% in August compared with August 2023, to ₽375 billion.
Russia raises its key policy rate
Russia’s economy is forecast to grow by 3.8% in 2024. But the rate increase will weigh on the economy as a whole and weaken that growth. Russia’s economy is growing on the back of large-scale state spending from the budget, not because of the Central Bank’s actions, even though the central bank ought to be doing everything it can to support economic development. One gets the impression that the Russian government has one set of development plans and the central bank quite another. Construction, for example, accounts for 13.4% of Russia’s economy together with related industries, and 11.5 million people work in construction — 16% of all those employed in the country. The fall in mortgage issuance in Russia (people are taking out fewer mortgages because the state-subsidised preferential mortgage programme has ended and the key rate has risen to 19%, pushing mortgage rates up) will hit the construction industry hard, and construction will drag down the sectors linked to it, including metals. What keeps things going is the military-industrial complex (MIC) and the related industries that deliver real economic growth. By comparison, China’s mortgage rate is 5%, while Japan’s average mortgage rate is 1.2% a year.