Policy rate

The policy rate is a key instrument of monetary policy which determines monetary conditions that are necessary to ensure stable inflation within the 5% target.

The policy rate determines the price of short-term money (UZONIA) in the interbank money market. It is the operational target indicator of the interest rate on deposits and loans between commercial banks on overnight terms.

For reference: By the Resolution of the Central Bank’s Board, from January 1, 2020, the policy rate of the Central Bank was introduced in order to regulate interest rates in the money market, and was defined as the main target indicator of monetary operations instead of the refinancing rate. The refinancing rate remains effective in practice and is equal to the policy rate.

The Central Bank's Board reviews and makes decisions on the policy rate based on economic conditions eight times a year according to a predetermined schedule. Press releases are published on the decisions taken.

How does a policy rate change influence the interest rates of commercial banks?

The operational objective of monetary policy is to ensure that interbank money market overnight interest rates develop close to the policy rate. The Central Bank achieves this operational objective through monetary instruments, particularly through the open market operations.

Policy rate adjustments have impact on interbank overnight interest rates, thereby causing changes in other longer-term interest rates in the money market. Movements in the money market interest rates, in turn, influence the interest rates for loans and deposits of commercial banks.

How does a policy rate change influence the economy and inflation?

The objective of the monetary policy is to ensure the 5 percent inflation target. To achieve the target, the Central Bank implements measures to balance the aggregate demand in the economy to the level of supply by adjusting the policy rate.

Interest rates in the economy have an effect on decisions of market participants to borrow, invest, save or consume.

A rise in the policy rate of the Central Bank increases interest rates in the economy. Higher interest rates increase the attractiveness of saving instruments and reduce the demand for debt instruments. In such conditions, market participants continue to save more and spend less. While the supply of goods and services remains unchanged, weaker demand for them serves to stabilize prices in the economy and, as a result, reduce inflation pressure.

Conversely, if there is a high probability that inflation will fall below the target in the forecast horizon, the policy rate is lowered.