Standing Rates: Credit growth had continued thanks to preferential interest rates, high inflation expectations and above-average rates of price growth in a number of sectors

Lending growth in Russia remains unabated, despite the Central Bank rate having been at ultra-high levels for the past six months. The pace of lending is comparable to that observed at the beginning of last year, when the key rate was more than twice as low.

The continuation of the credit boom is partly explained by the fact that the actual loan rates in most segments have risen by that much. In the corporate and mortgage segments they are subsidised by the government, and in the car loan segment, by dealers. The average rate on loans of more than a year is only higher than the key rate in consumer lending.

As a result, actual rates are close to the level of inflation expectations, which remain high among Russians, significantly higher than average inflation. The inflation observed by citizens is also decreasing by negligible amounts. Thus, the Central Bank rate is not having the expected effect on the market. On one hand, there is money in the market at a substantially lower cost, and on the other hand, in some of its significant segments, the rate of price growth is significantly higher than average inflation.

The growth of lending to individuals and organisations in Russia has continued despite the extremely tight monetary conditions, according to a Central Bank's report on the development of the banking sector. Mortgage lending has even accelerated in recent months, increasing from 1.2% monthly growth in March to 1.4% in April (mainly due to a decrease in early repayments rather than a significant increase in new issuances). The issuance of consumer loans grew by 1.8% in April and March compared to the previous month. The highest growth rates in the retail segment are seen in auto lending: +5% month-on-month in March and +4% month-on-month in April. The corporate segment also saw an increase in March and April of almost 2% (1.8% month-on-month and 1.9% month-on-month, respectively). These lending rates are comparable to those observed at the beginning of last year when the key rate was 7.5%. Such lending dynamics exclude the possibility of ensuring sustainable disinflation, analysts at the Central Bank repeatedly warn in their new ‘What Trends Say’ report.

The continuation of the credit boom, even when the Central Bank has kept the key rate at the prohibitively high level of 16% for six months, is partly explained by the paradoxical fact that loan rates have not risen as significantly.

For organisational loans (with terms of more than one year), the average rate remains below the key rate due to programmes in which these rates are subsidised by the state. After the tightening of monetary policy, the average rate rose from 11% to only 15%. Military-industrial complex companies are particularly eligible for preferential loans. According to Alexey Zakharov, Senior Vice President of PSB (the main bank backing the military-industrial complex), for example, the share of preferential loans in machine building makes up 32% of the total volume. Manufacturing industries, as well as organisations engaged in professional and scientific activities (also associated with the military-industrial complex), are the leaders in terms of the volume of loans raised in recent months (over 1.5 trillion rubles in March). Only wholesale and retail trade enterprises borrowed more (1.8 trillion rubles in March). Manufacturing industries rank first in terms of total volume of debt (16 trillion rubles). Over the year it grew by 15%.

In the retail segment, the generosity of banks, as we have previously written (→ Re:Russia: The Two Tap Policy), largely stemmed from the rapid growth of deposits, driven by both rising citizen incomes and increasing deposit rates. In 2023, citizens deposited 7.4 trillion rubles (+19.7% year-on-year). The inflow of funds continued in 2024, with an increase of 2.7 trillion rubles in four months.

Another factor is preferential government programmes. Due to the preferential mortgage programmes, which will continue to operate at least until 1 July, the average rate on home loans has remained stable at 8-9% for many months. In car loans, the rates on new cars are being actively subsidised by dealers, notes Sergei Udalov, Executive Director of the Avtostat agency. According to data from the ‘E-Credit’ service, which Udalov cites, the average rate, considering preferential programmes, has been kept at a level close to the key rate (16-18%) since autumn; as of April, it averaged 15%. However, for short-term loans (up to 24 months), special conditions apply, with virtually no overpayment.

The only market segment in which the average rate exceeds the key rate is consumer loans. For terms longer than one year, citizens borrowed at an average rate of 17.4% in March. Over the year, the rate increased by approximately 5 percentage points. The average rate for short-term loans in March was 24.3%. This category reacted poorly to the tightening of monetary policy until the beginning of 2024 (back in December, the average rate was 21%). The increase in recent months may be due to banks sharply increasing the issuance of credit cards, which are accounted for as short-term loans. Analysts at the Central Bank note that credit cards represent a significant volume of new loans issued to individuals. They attribute this to borrowers actively using the interest-free grace period, managing to repay the debt before the bank charges interest.

Thus, it turns out that actual rates are close to the level of inflation expectations. In May, they increased from 11% to 11.7%, according to an inFOM survey, and from 12.2% to 13.5% for those surveyed who did not have savings, who are more sensitive to price changes (→ Re:Russia: Gas and Brake). High inflation expectations reduce sensitivity to interest rate levels. The inflation observed by citizens, according to the same survey, was 14% in May, and 16.3% for the subgroup without savings. In a survey by the MMI Telegram channel, observed inflation held at 16.9%, while expected inflation jumped from 16.1% to 17.1% over the month. The high credit activity of the population can be explained by the fact that real inflation is closer to these estimates than to the average estimates of Rosstat, especially in imports, which are under pressure from sanctions-related costs and more complicated logistics. Economists are increasingly discussing the problem of correctly analysing price levels in different sectors. For example, Oleg Vyugin, Chairman of the Board of Directors of NAUFOR, pointed out that non-oil and gas budget revenues are planned to increase by 22% this year according to the government's plan: ‘Let's say the economy will go by 2-3%, what kind of a miracle is that? I think that the financiers and economists at the Ministry of Finance calculated well that the real price level is higher. Therefore, VAT, profit tax, and personal income tax will bring about this 22% growth’.

In any case, the dynamics of lending clearly indicate that the Central Bank rate does not have the proper influence on the market. On the one hand, the economy has money, the value of which is significantly lower, and on the other hand, there are important segments where the rate of price growth is substantially higher than average inflation.