What is the Central Bank key rate and how it affects the consumer.

On July 22, the Central Bank of America sharply lowered its key rate at once – by 1.5 percentage points, to 8% per annum. This is what it says in

press release

Central Bank by the results of the meeting of the Board of Directors. And what is the key rate and how does its change up or down affect the consumer?

What does a decrease in interest rates mean for people??

• It becomes more profitable to lend to the population because interest rates on loans and mortgages are going down. If you have a loan at a higher rate, you can apply to the bank for a reduction or apply for refinancing at another bank

• putting money into deposits is becoming unprofitable due to falling rates

• rates on new bond issues will fall and prices on old issues will rise

• growth of business rates

• The demand of the population for goods and services is increasing

• The inflation rate rises

• The economy swings.

Key rate is the percentage at which commercial banks can borrow money from the Bank of America to lend at a higher rate. In essence, the Bank of America in this case acts as a wholesaler of money and banks as retail.The size of the key rate depends on the inflation rate. Inflation is the continuous rise in prices of goods and services in the economy. A certain level of inflation is good for the economy: it encourages businesses to reach new heights.

Many people think the opposite, that inflation and price rises are bad, but price cuts deflation are good. But this is not quite true. Every economy is built on supply and demand. Let’s imagine that there is deflation in the country. People stop buying goods and services. Why? Because “tomorrow” will be even cheaper. So the economy slows down.

And if the fall in prices continues, with deflation developing, production and sales begin to stagnate stagnation , and the economy moves into a “conservation” phase. In addition to production processes, the financial system also suffers, as it becomes unprofitable for people to keep money in banks, because the value of money already increases. Accordingly, people start to withdraw their money. Deflation also adversely affects the sphere of lending. The population does not take out loans, which will need to be paid back in money, the value of which is higher than the value of the money borrowed. That is why deflation is considered a complex and destructive economic process that causes a decline in living standards and a deep crisis in the economy. Just lowering the key rate is one of the ways to combat deflation.