The National Bank raised the discount rate: how will this affect citizens' wallets?

On July 27, the National Bank decided to raise the discount rate by 0.25 percentage points, from 9% to 9.25%. Although the change seems small, it may affect people's daily lives. 
Let's figure out what this means and what to prepare for.

Why is the rate being raised?

The discount rate is the interest rate at which the National Bank lends to commercial banks. Raising it is one of the tools used to combat inflation. Currently, annual inflation in Kyrgyzstan stands at 8.7%, while the regulator's target is 5-7%.

As economist Iskender Sharsheev explains, raising the rate makes loans more expensive, reduces the money supply in the economy, and thus helps to curb price growth. However, this decision has other consequences.

"Commercial banks base their calculations on the discount rate. If it rises, interest rates on loans may also rise. This is especially true for new loans, such as mortgages, car loans, or consumer loans. And those who already have loans with a floating rate may see an increase in their monthly payments. If, for example, the average loan rate at the end of the year is 18%, this will hit borrowers' wallets hard," said the economist.

At the same time, this is good news for depositors. Banks are raising interest rates on deposits to attract money from the population. This means that those who keep their money in KGS on term deposits will be able to earn more. This may encourage people to save rather than spend.

After a similar rate hike in 2021, residents were more active in bringing their money to banks, specifically to deposits in the national currency.

“One of the goals of raising the discount rate is to slow down price growth (inflation). When loans become more expensive, people and businesses spend less. This reduces demand and prices rise more slowly. This is especially true for imported goods,” said the expert, noting that at the same time, one should not expect an immediate effect.

Prices are currently rising due to seasonal and external factors, such as high fuel and food prices worldwide. Therefore, inflation may remain high for some time.

What will happen to the KGS exchange rate?

When the discount rate rises, investments in KGS become more profitable. This could strengthen the national currency and reduce demand for dollars and euros. This means that imports could become cheaper, which would slightly curb the growth of prices for foreign goods.

Expensive loans are a drag on the economy. People take out fewer loans, buy less, and businesses are also more cautious. This could particularly affect credit-dependent sectors such as construction, trade, and small businesses. Wage growth may slow down and, in some cases, wages may even be cut.

“In addition, for people with low incomes, the rate hike may mean that it will become more difficult to take out loans for housing, medical treatment, or education. People will have to plan their expenses more carefully,” the expert concluded.