The key rate is the main instrument of the monetary policy of the Russian Central Bank of Russia. It is used to target inflation rate keeping it close to 4%. Every decision on the key rate has a direct impact on the national economy, defining the cost of money, and ultimately deposit and loan rates. The key rate is also used as an indicator for calculating fines and penalties in commercial contracts. However, decision-making process – how the management of the Central Bank decides on the key rate and its further changes – was unknown. In May 2018 Russian monetary authority disclosed the behind-the-scenes machinery behind the key rate decisions.
Basically, the decision is made in 6 stages. The cycle repeats eight times a year – for every meeting of the Board of Directors during a year. Here are the main elements of the ‘key rate cycle’.
At the first stage, 3-4 weeks prior to decision the basic and alternative economic scenarios are prepared, based on the factors that may affect the economy. The scenarios are discussed with the industrial associations and businesses.
Second stage – 2 weeks prior to decision – is dedicated to agreeing the parameters of the basic and alternative scenarios. This includes meetings with the ministries focused on economy and regional offices of the Central Bank. Central Bank may also issue statements hinting on upcoming decision, if it sees it necessary.
Seven days before the final decision on the key rate is called "the week of silence". During this period, any statements or publications of representatives of the Bank of Russia which may affect the market expectations about the forthcoming decision are prohibited. Meetings are held only within the Central Bank. The Central Bank discussed the potential decisions and signals that need to be done on further decisions (if necessary). Basically, two points are discussed: what decision on key rate is the most appropriate and what wordings should accompany the decision.
At the fourth stage, the Supervisory board convenes for a meeting, gets the latest report on economic forecasts and decides on the key interest rate, the text of the draft press release and approves its final wording. The meeting should be adjourned to later than 13:30 Moscow time.
At 13:30 press-release on key rate is published on the Bank’s website (this launches a fifth stage of the cycle). At 15:00 Moscow time the same day, the Chairman of the Central Bank of Russia gives a public statement about the decision, which is broadcast in real time on the Bank’s official website in Russian and English and which is available to the general public.
For two weeks after the statement the Central Banks further clarifies the decision, meets with the analysts, academia and businesses (the sixth stage). The officials are giving interviews to the mass-media to explain why this particular decision has been made. This concludes the ‘key rate cycle’.
This is it – after a while, the cycle starts again. Last decision was made on the 27th of April, 2018 when the Central Bank kept the key rate at 7.25%.