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How do banks react to key rate changes and does monetary policy impact inequality: new issue of Russian Journal of Money and Finance

28 июня 2022 года

The second issue of the scholarly quarterly Russian Journal of Money and Finance of 2022 published by the Bank of Russia has been released.

The negative impacts of income inequality have been well studied by economists, but the question of whether and how monetary policy can influence inequality has no clear answer. For instance, some studies claim that a tougher monetary stance leads to increased inequality, since growing interest rates improve the welfare of creditors (which are usually wealthier households) and lower it for borrowers (relatively poorer ones). Other studies come to the opposite conclusion that tighter monetary policy decreases inequality because financial assets of usually wealthier households depreciate due to rising interest rates. Alyona Nelyubina (Bank of Russia; Lomonosov Moscow State University), analysing data for Russian regions, concludes that, at least in the short term, tougher monetary policy of the Bank of Russia reduces inequality. Since this is more evident in the regions with higher average per capita household incomes, the author suggests that the tightening of monetary policy influences inequality through the welfare channel.

A change in the key rate impacts the base level of short-term interest rates in the economy, the cost of loans and deposits for businesses and households. Henry Penikas (Bank of Russia; Lebedev Physical Institute), based on the data he collected for 2020–2022, studies how quickly a change in the Bank of Russia key rate influences Russian banks’ interest rates on retail deposits: over the period under review, the Bank of Russia both increased and decreased its key rate. The author concludes that the pass-through of key rate changes to deposit rates is incomplete, and their real adjustment by banks follows key rate movements with a lag of about two months. Specifically, banks’ reaction to the key rate increase by 75 bp in October 2021 extended over two months: deposit rates increased by 45 bp in November 2021 and by another 25 bp in December 2021. The paper notes that deposit rates respond faster to a decrease in the key rate rather than to its increase.


These and other papers of the second issue of the Russian Journal of Money and Finance for 2022 are available on the website.