Setting the discount rate of interest. What is the Central Bank discount rate? simple interest chart

The forex world revolves around discount rates. The discount rate is perhaps the most an important factor that determines the price of a currency. Therefore, it is extremely important to be aware of monetary policy (decisions on discount rates) Central Bank the country whose currency you work with.

The main factors influencing the decision of the Central Bank regarding discount rates is price stability or inflation.

Inflation is a constant increase in the prices of goods and services.

It is inflation that is the reason that you pay 100 rubles per kilogram of sausage, although 20 years ago you paid 20 times less.

It is generally recognized that moderate inflation is an indispensable component of economic growth.

However, too high inflation can destroy the economy, which is why Central Banks around the world constantly monitor indicators such as CPI (Consumer Price Index), PCE (Personal Consumption Index).

In an attempt to contain inflation, Central banks most often raise interest rates, which leads to lower inflation and slower economic growth.

This situation arises for the simple reason that raising interest rates causes consumers and businesses to save money and reduce borrowing, which leads to a decrease in economic activity and putting money under the mattress.

On the other hand, a decrease in discount rates leads to the fact that the level of loans, both from consumers and from commercial structures, is growing (as banks reduce the level of requirements for the borrower), which, in turn, leads to an increase in costs, thus contributing to economic growth.

How might this affect the foreign exchange market?

Exchange rates directly depend on the size of discount rates for the reason that the inflow or outflow of foreign investment into the country depends on their level. Discount rates are the main factor determining the attractiveness of the economy for investors (based on the size of the discount rate, the investor determines whether he should invest in the economy of a given country).

If you were offered to put money into a savings account at 1% and at 0.25%, which would you choose?

We would have done the same - left the money under the mattress. Do you understand what we are talking about? However, we do not have such an option.

Well, yes! You would choose the offer to deposit money at 1%, wouldn't you?

Of course… 1% is more than 0.25%. The same thing happens with currency!

The higher the discount rate in a country, the stronger its currency, and vice versa, in countries with a low discount rate, the currency weakens.

It's not difficult at all.

The main thing to remember is that the level of the discount rate within the country has a direct impact on the interest of investors and, as a result, on the price of the local currency on the international market.

The situation in the markets is constantly changing depending on the ongoing events and all kinds of situations. The same thing happens with discount rates, they also change, but not so often.

Although, most often, discount rates change gradually, depending on changes in monetary policy, even a simple report can affect the “mood” of the market.

This leads to the fact that discount rates change more sharply than previously expected, and even begin to move in the opposite direction.

So you should be on your guard!

Discrepancy in discount rates.

Take any currency pair.

When deciding whether a currency will appreciate or weaken, many currency traders use the technique of comparing the discount rates of one country issuing one currency of a given currency pair with the discount rates of a country issuing another currency of this currency pair.

The difference between these discount rates, i.e. the difference in interest rates is the first thing you should pay attention to. Such discrepancies will help you identify changes in the currency you are interested in that are difficult to notice on a superficial examination.

An increase in interest rate divergence usually has a positive effect on a stronger currency, while a decrease in the divergence has a positive effect on a weaker currency.

Cases where the discount rates of a currency pair move in opposite directions often result in a huge swing.

The moment when the discount rates for one of the currencies of the currency pair are rising and the other is falling is the perfect time for sharp swings.

Nominal and real rates.

When people talk about discount rates, most often they mean either nominal or real discount rates.

What is the difference?

The nominal discount rate is calculated taking into account the expected inflation, as a result of which it often does not coincide with the real one.

Real discount rate = nominal discount rate - expected inflation

Nominal rate - the base rate that can be observed (i.e. interest on bonds).

In turn, the markets do not pay much attention to such rates, mainly focusing on real interest rates.

If you held a bond with a par value of 6%, but the annual inflation rate was 5%, your real return would be 1%.

Big difference right? To avoid this, remember not to confuse nominal and real discount rates.

Discount rate, or refinancing rate is an instrument of monetary regulation, one of the methods of anti-inflationary policy, with the help of which the Central Bank influences the interbank market and the country's economy. This monetary policy instrument determines:
1) The cost of attracted and placed monetary resources for the subjects of the monetary market.
2) The amount of the interest rate at which the Central Bank provides interbank loans as a lender of last resort. Consequently, the discount rate is the lowest among all existing interest rates.
Reducing it makes loans cheap for commercial banks, and they tend to get a loan. At the same time, excess reserves of commercial banks increase, causing an increase in the amount of money in circulation. Conversely, an increase in the discount rate makes loans unprofitable. Moreover, some commercial banks those with leveraged reserves try to get them back as they become very expensive. The reduction in bank reserves leads to a reduction in the money supply.

3) Interest rates of commercial banks on issued loans for legal entities and individuals, which are higher than deposit ones.
4) Deposit rates. As a rule, banks try to set the deposit rate slightly lower than the discount rate in order to make a profit.
5) Adjustment of the exchange rate of the national currency to foreign currencies. Exchange rates determine the inflow or outflow of foreign investment in the country. Discount rates are the main factor determining the attractiveness of the economy for investors.
6) The cost of government securities on open market.
7) The amount of inflation, which should be moderate.
An increase in the SA leads to a slowdown in economic growth. The reason is that the decrease in the level of loans forces consumers and commercial structures to save money, which leads to a decrease in economic activity and the accumulation of money outside the banks.
Reducing interest rates leads to an increase in the number of loans issued by both consumers and organizations, which, in turn, leads to an increase in costs, thereby contributing to economic growth.
8) Fiscal measures: calculation of the tax base, fines, penalties, etc.

How the refinancing rate is set

The size of the discount rate is set by the Council of the Central Bank, depending on various factors, such as: expectations regarding the level of inflation, acceleration or deceleration of GDP growth, general economic development trends, macroeconomic and budgetary processes, the state of the monetary market, price stability, etc.
This tool is one of the levers for managing the financial and economic situation in the country, therefore, it is impossible to raise or lower the rate without a reason: there must be strong macroeconomic arguments for changes.
By changing the discount rate, the Central Bank implements a discount currency policy to regulate the movement of capital and balance payment obligations.
The size of the discount rate is the one that must be made public through the media every time the size of the rate has changed. For example, as of 2014, the Board of Directors of the Bank of Russia announced the current refinancing rate equal to 8.25%.

Nominal and real rates

It is necessary to distinguish between real and nominal discount rates.
The nominal discount rate is calculated taking into account the expected inflation, as a result of which it often does not coincide with the real one.
Real discount rate = nominal discount rate - expected inflation
The nominal rate is the base rate that can be observed (i.e. interest on bonds).

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The discount rate is the most important indicator that forms the main aspects of the activities of credit institutions. So, it is set by the national bank of the country for other commercial banks. Its size depends on the monetary policy pursued by the state, and the goals that it pursues.

For example, when inflation is high, the discount rate rises. As a consequence, the cost of loans issued by the national bank becomes more expensive. Accordingly, commercial banks become much more expensive, the demand for credit services decreases. In such a simple way, the government contributes to a decrease in the volume of money supply, and then the withdrawal of part of the cash from circulation. This helps stop inflationary growth and keep it within a certain limit.

The discount rate is an instrument of the central bank, with the help of which it regulates the main processes of the economy, for example, maintains the national currency at the required level, controls the amount of money in circulation, forms the country's gold and foreign exchange reserve. In practice, it is rarely observed sharp increase or decrease, as a rule, minor but no less effective adjustments are allowed.

When the discount rate increases, the exchange rate of the national currency stabilizes. In addition, commercial banks are experiencing a lack of credit resources, because central bank loans are becoming expensive. It was at this time that the discount rate on deposit operations increased. Under the proposed conditions, it is more profitable for the population to transfer the available capital than to invest in production or financial activity. Thus, there is a withdrawal of funds from circulation for a certain period, and hence a decrease in This method used in the implementation of a policy called "dear" money.

And the policy of "cheap" money implies a reduced refinancing rate. It is introduced when there is a decline in industrial activity in the country. The government understands the need to support a certain industry and creates such conditions for credit organizations that allow them to reduce loans, especially for legal entities. This is how capital flows into industry or into the sphere of specific services, and the development of the industry is stimulated.

It is worth noting that the above measures are considered effective, but they are valid only for a certain period of time. A further increase or decrease in the rate leads to negative consequences. Unfortunately, every event has some drawbacks. The regulation of the refinancing rate also has " reverse side medals, which is as follows:

• An increase in the discount rate provokes a decrease wages, business leaders are forced to cut the number of jobs. All this naturally increases the burden on labor exchanges and creates tension in society.
• Lowering the rate, of course, gradually brings the country out of the crisis, as it contributes to the development of the industrial sector. In addition, the state thus supports small and medium-sized businesses, allowing them to stay afloat even in the most difficult difficult situations. But only for a while, then there is a rapid inflationary growth, which threatens the entire economy of the country.

It can be concluded that the discount rate is good tool serving to achieve the main objectives of the state's monetary policy, but it should be managed competently.

It is directly related to lending and the banking sector. The discount rate is the main indicator of the monetary policy of the Central Bank.

Discount rate in Russia

Discount rate - interest rate, according to which the Central Bank lends to commercial banks. Sberbank, Rosselkhozbank, VTB and other institutions receive cash, which they subsequently issue to the public and legal entities, from the Central Bank at a percentage determined by the discount rate.

The discount rate is the refinancing rate, which shows the percentage increase in the value of securities issued by the state. Investor buying bonds government loan, after the expiration of the contract, receives their value, increased by the official discount rate established by the Central Bank.

Discount rate value

Adjusting the discount rate is the most important tool in determining the value of a currency. The more stable the economic situation in the country, the lower the refinancing rate. The Central Bank raises the rate in times of crisis in the state in order to stabilize the situation. What does the discount rate affect?

• interest rates on loans and deposits - with an increase in the discount rate, they grow, although in developed countries the dynamics will be more noticeable than in developing ones;
• the amount of penalties - are charged on taxes, fines and contracts in case of delay in payments in the amount of 1/300 of the refinancing rate for each day;
• the amount of monthly payments on loans with floating rates linked to the accounting index;
• the volume of investments in the country - the lower the rate, the more profitable it is for the investor to invest, with its increase, there will be an outflow of capital;
• exchange rate dynamics - if the discount rate rises, this leads to a weakening, and as a result, a devaluation of the national currency.

The discount rate and inflation rate are inversely proportional. If the Central Bank raises the rate, this will lead to a slowdown in economic growth and a decrease in purchasing power for goods - inflation in the country will decrease.

A bond is an issuance character that provides the right to accept from the issuer a regular percentage of the nominal price of the bond (coupon payment), as well as a full return of the bond's face value at the time of its maturity.

This security is an analogue of a bank deposit, because funds are also invested here in advance known term and at the same percentage. Another similarity is that the size of the bet or income is approximately the same for both instruments at once.

The difference lies in the fact that the yield on a bond can change, because the market price of this instrument changes, and the size of the income interest rate can reach tens, and sometimes hundreds of percent per annum in times of economic instability.

Bond parameters

1. Price, which can be nominal, issue and market
2. The redemption date is the date when the issuing company undertakes to return the full amount of the debt (or face value)
3. Redemption price or the procedure for its establishment, usually such a price is equal to face value
4. Coupon interest rate, expressed as a percentage of the nominal price. For example, 5% per annum of the face value of 1000 rubles. or 50 rubles. in a year.
5. Coupon Payment Dates - Usually coupons are redeemed annually, semi-annually or quarterly.

Coupon yield of bonds

Shows the investor how much income he will receive if he purchases a bond at a nominal price. The coupon yield of bonds is calculated according to the formula given above.

Current yield

Gives an idea of ​​how much income an investor can expect if he buys a bond at the current market price. The current bond yield is calculated using the formula disclosed above.

Total return

The yield of bonds to maturity reflects the entire amount of profit that an investor can expect if he buys it at the current price and holds it until the end of its circulation period.

Fair value (or total yield) of a coupon bond calculated as follows.