High key rate of the Central Bank

Is it possible that enterprises will go bankrupt on a mass scale due to the high key rate of the Central Bank?

The statement by Rostec CEO Sergey Chemezov about possible mass bankruptcy of companies due to the high key rate of the Central Bank has received a response from the Bank of Russia. Elizaveta Danilova, Director of the Financial Stability Department of the Central Bank, said that the redistribution of resources in favor of more efficient companies in conditions of labor shortage can be a boon for the economy. She emphasized that the Central Bank closely monitors financial stability and credit risks to avoid systemic problems. Special attention is paid to loans with floating rates, the share of which has grown significantly. So far, Danilova said, the Central Bank has not seen a significant increase in loan restructuring or defaults. Low unemployment (2.4% in August) and the forecast that it will remain at 2.6% until 2027, combined with expected growth in labor productivity, are the backdrop for these statements.

The consequences of the CBR's key rate hike to record levels are ambiguous and depend on many factors. A positive consequence could be a reduction in inflation, which is the main objective of the Central Bank. However, high lending rates create significant risks for businesses:

Enterprise bankruptcies: High interest on loans reduces business profitability, especially for businesses with low margins. This can lead to an inability to service debts and, as a consequence, to bankruptcies. The Central Bank recognizes this risk, but believes that reallocating resources to more efficient companies can be good for the economy in the long run.

Reduced investment: High interest rates make investment less attractive, which could slow economic growth. Companies will be less inclined to expand production, upgrade equipment, and make other investments that require debt.

Slower economic growth: The combined effect of bankruptcies and lower investment could lead to slower economic growth, which would negatively affect living standards.

Increase in unemployment: Business bankruptcies may lead to job losses and increase unemployment. However, the unemployment rate in Russia is currently extremely low, which mitigates this risk.

It should be noted that the situation is complicated not only by high interest rates, but also by sanctions, restricted access to international capital markets and other macroeconomic factors.

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