Russia’s central bank on Friday raised its key interest rate by two percentage points to a record-high 21% in an effort to stem growing inflation as massive government spending on the military amid the fighting in Ukraine strains the economy’s capacity to produce goods and services and drives up workers’ wages.
can someone ELI5 what does a central banks’ interest mean? and how is raising it supposed to combat imflation?
When someone borrows money they typically pay interest on it to the person they borrow it from. The lender can set what that interest rate is. A higher interest rate means that people are less likely to borrow money because it will cost them more. The “central bank” would be a government entity that lends money, often to other private banks. By raising their rates other banks also have to raise rates or lose money on their own loans. The idea of higher interest rates is to reduce the amount of loans. How that stops inflation is somewhat of a mystery, and the study of economics is not exact.
Doesn’t higher interests mean more money is spent paying those interests, meaning less money is available to spend on other things which in turn reduces the monetary supply in circulation which curbs inflation?
Yes, that’s the theory, but it also has the side effect of making banks richer, because all the money that would be flowing out inflating the economy is now flowing into the banks inflating their stores.
That’s not really true. Banks getting higher interest on loans also pay out more interest on deposits, otherwise they’re unable to attract and retain customers. FI profitability is based on net interest margin (revenue from lending - losses from deposits), and they need deposits to have the money to lend out so they can’t arbitrarily lower their deposit account rates to increase NIM.
Banks get richer no matter what happens, because people need loans. If anything, higher rates make it more challenging for banks to make money as people are less able to make repayments and less likely to take out loans for luxury purchases or holidays.
Finally someone speaking with actual sense
Governments need money. If the Government can’t collect enough taxes to keep pay their bills, they have to borrow. Hyperinflation sets in when the Government can’t collect taxes and nobody will loan it to them so they just print massive amounts of worthless paper.
Raising interest rates entices people to loan the government money and increases the amount of cash paid for loans.
Both of these consequences soak cash out of the economy which increases the value of the cash that remains which is what combating inflation really is. While providing non-printed currency the government can use to pay bills.
so the Russian government are promising to pay back more interest if someone loans them?
If someone is willing to loan them money, the Russians would have to promise to pay interest
Increased interest rates make it more expensive for businesses to borrow money. This causes them to tighten up expenses to remain profitable which means cutting hours and laying people off. The more people that are unemployed, the lower wages become.
Inflation is caused by companies raising prices in response to higher revenues. Forcing people into unemployment stops that by taking money out of circulation, it just sits in accounts as capital, rather than being used to pay wages
Three days to Kyiv!
Sanctioned to the stone age!
Are you suggesting that a 21% interest rate is a sign of a healthy economy?
No, but it doesn’t seem a lot
Did you never take high school economics or did you just sleep through it?
I just assume they’re all 13 and haven’t taken the class yet
In contrast to what Lemmy or any other internet community is claiming, I do not know economics enough to say what’s happening with the Russian economy for certain.
But what can I see, is that inflation is not as high as in 2022 or 2014 and Russian authorities have downed the amount of foreign currency a company that sells something for dollars should exchange for roubles. And the war is still going on.
So… notwithstanding the colossal sanctions, Russia is still standing 🤷🏼♂️ but the west has run out of things that they can sanction. Unless you think that potash, ammonia, natural gas, and nuclear fuel would be sanctioned in the near future. In this case, please consult reality. The choice that we’re about to see made is between abandoning Ukraine and military intervention.
You don’t have to know more than basic high school economics to understand why a 21% interest rate is disastrous for any nation. Russia isn’t special.
Russia had 18 for a long time and it didn’t look like a big deal. All these talks look exactly like reversed copium meme from 2022
The future of USA as dollar supremacy continues to decline.
