The key rate: how a Bank of Russia decision reaches your portfolio

The key rate is the rate at which the Bank of Russia supplies liquidity to banks and takes it back. It has no direct relationship to your account. Its indirect relationship decides everything.

Step one: banks

A bank that can borrow from the regulator at the key rate will not pay depositors materially more. Nor will it lend materially cheaper. The regulator's rate becomes the reference point for the price of money across the economy.

{{figure:key-rate-transmission|caption=Transmission is not instant: deposits react within weeks, credit and the economy within quarters}}

Step two: bonds

Here the link is the tightest and the most mechanical. The coupon on a bond already issued is fixed forever. If the price of money in the economy has risen, the old coupon has become unattractive — and the bond can adjust in only one way: by getting cheaper.

The longer the bond, the sharper the reaction. The measure of that sensitivity is duration.

Step three: equities

Here the link is weaker and works through two channels. Expensive money makes corporate borrowing dearer and cuts profit. And expensive bonds become a competitor to equities: if a risk-free instrument pays a decent return, the return demanded from a risky one rises, and the fair price of a share falls.

Step four: the rouble

A high rate makes rouble assets more attractive and supports the currency. This is the noisiest channel: the exchange rate also answers to the trade balance, to capital flows and to expectations.

What to watch rather than memorise

The current rate and the meeting dates are data, not knowledge. They live in the news feed and update themselves. The knowledge is understanding which channel fires first and what to look at after the decision.

More on the regulator's guidance: Central bank guidance: why the wording matters more than the decision.