National Bank Raises Key Rate: How Will This Affect Citizens’ Wallets?

Yesterday, on July 28, the National Bank decided to raise the key rate by 0.25 percentage points — from 9% to 9.25%. Although the change seems minor, it could affect people’s daily lives. Let’s break down what this means and what to expect. Why is the rate being raised? The key rate is the interest rate at which the National Bank lends to commercial banks. Increasing it is one of the tools used to combat inflation. At present, annual inflation in Kyrgyzstan stands at 8.7%, while the regulator’s target range is 5–7%. As economist Iskender Sharsheev explains, a higher rate makes loans more expensive, reduces the money supply in the economy, and thus helps curb price growth. However, this decision also has other consequences. “Commercial banks base their calculations on the key rate. If it rises, interest rates on loans may also increase. This is especially true for new loans — for example, mortgages, car loans, or consumer loans. Those who already have loans with a variable rate may notice higher monthly payments. If, for instance, the average loan rate reaches 18% by the end of the year, it will significantly impact borrowers’ wallets,” the economist noted. For depositors, however, this is good news. Banks, in an effort to attract public funds, raise interest rates on deposits. This means that those who keep money in soms in fixed-term deposits will be able to earn more. This could encourage saving rather than spending. After a similar rate hike in 2021, residents were more active in putting money into bank deposits — especially in the national currency. “One of the goals of raising the key rate is to slow down price growth (inflation). When loans become more expensive, people and businesses spend less. This reduces demand, and prices grow more slowly. This is especially relevant for imported goods,” the expert said, noting that one should not expect an immediate effect. Currently, prices are rising due to seasonal and external factors — such as high global fuel and food prices. Therefore, inflation may remain high for some time. What will happen to the som exchange rate? When the key rate increases, investments in soms become more attractive. This can strengthen the national currency and reduce demand for dollars and euros. As a result, imports may become cheaper, slightly restraining the rise in prices for foreign goods. Expensive loans are a constraining factor for the economy. People take out fewer loans, make fewer purchases, and businesses also act more cautiously. This can especially impact sectors dependent on credit — such as construction, trade, and small business. Wage growth may slow, and in some cases, there may even be layoffs. “In addition, for people with low incomes, a rate hike may mean that getting a loan for housing, medical treatment, or education will become more difficult. They will need to plan their expenses more carefully,” the expert concluded. https://www.akchabar.kg/article/mnenie-omthqtdxrzcoifeu/natsbank-povisil-uchetnuyu-stavku-kak-eto-povliyaet-na-koshelki-grazhdan-fhvwomoiwvmmabgv