In the State Duma, they explained how the key rate affects the budget deficit.
In an interview with NEWS.ru, Dmitrieva pointed out that high mortgage rates essentially make home loans "null," with government attempts to support these loans adding to budget costs. She was referring to the subsidization of low-interest mortgage rates that accounted for 1.2 trillion rubles in the budget, a figure set to rise due to increased mortgage rates in recent months.
"To cover the budget deficit," Dmitrieva explained, "the government resorts to borrowing on the domestic market, but only at market rates, which are also high due to the key rate. This results in increased costs for servicing debt, which in turn also increases the deficit." The deputy of the State Duma elaborated.
As previously reported by "Monokle," the Bank of Russia's Board of Directors, contrary to expert expectations, lowered the key rate by 100 basis points to 20% annually during a June meeting – the first such reduction in the past three years.
The key rate is just one of many elements in macroeconomic policy. It's unfortunate that, in Russia at the moment, economists and all interested parties are only vocally discussing the key rate, blaming it for all the problems. In truth, it is, by principle, merely a reflection of the overall economic situation in our country. For a more detailed understanding of this, read the Monokle article entitled "The Key Rate Is Not the Main Factor Driving Growth, Nor the Only Factor Driving a Downturn."
Enrichment Insights:
- The article is discussing an interview by Dmitrieva, who is a deputy in the State Duma, about mortgage subsidies. The subsidies have a substantial impact on the Russian budget and were initially budgeted for 1.2 trillion rubles. However, with increased mortgage rates, the cost to the budget is expected to rise.
- Moscow has been running various subsidized mortgage schemes since 2020, offering lower mortgage rates to Russian citizens, such as 8%. The cessation of these subsidies has resulted in a decline in home sales and new construction, as buyers now face higher interest rates. Mortgage rates are currently much higher, averaging around 23.03% by the end of 2024, with some banks offering rates as high as 31%.
- The government's borrowing on the domestic market to cover the budget deficit is at market rates, which are also high due to the key rate. This is leading to increased costs for servicing debt and adding to the budget deficit.
- The key rate is just one of many components of macroeconomic policy and is often blamed for economic troubles; however, it is only a reflection of the overall economic situation in the country.
"In light of the increasing budget costs associated with mortgage subsidies, the government may need to seek additional finance through borrowing on the domestic market, given the high market rates."
"The Monokle article suggests that while the key rate is often criticized as the primary cause of economic troubles, it merely reflects the overall state of the economy in the country, and other factors, such as the finance sector and industry, may also play substantial roles."
