Why is the refinancing rate set?

The reflex rate refers to the most common and effective instruments by which the state regulates the state of the banking sector. If earlier the refinancing system was intended to supervise the circulation of money, in the modern world it is increasingly based on assistance to credit institutions. And it should be noted that has been realized for many years and quite successfully.

So, the refinancing rate is the percentage that the country's national bank issues a commercial loan in connection with the availability of the latter's temporary financial difficulties. Thus, the government ensures the reliability of individual credit institutions, and accordingly, the stability of the entire banking system. After all, as we know, the collapse of one large commercial bank may lead to the fall of the rest, which will inevitably lead to a crisis in the economy of the whole state, and possibly on a global scale.

In practice, the refinancing rate is set by the national bank annually and is approved in the monetary policy developed by it jointly with the state bodies. Of course, not every organization can get such a loan, but only having a good reputation and a high-quality credit history. Moreover, if a central bank has doubts about the solvency of a potential borrower, then it takes a final decision based on the audit opinion of the outside organization. After confirming the creditworthiness of the borrower, a loan is issued for a certain period, after which the commercial bank returns the taken amount taking into account the interest.

The size of the refinancing rate is the main method of adjusting the volume of money supply in circulation. According to the current legislation regulating the activity of credit institutions, the main aspects of monetary policy are approved by the national bank every year, in particular, the money supply is targeted, in other words, the establishment of limit volumes. If in the course of analytical work it is revealed that the volume of money in circulation exceeds the limit, the rate of refinancing of the Central Bank is increased. This naturally leads to a rise in the cost of loans issued to the population. Then potential borrowers have to significantly reduce costs due to the lack of funds to pay the loan. Accordingly, the reverse situation occurs, if a noticeable decrease in the money supply in circulation is revealed. The rate of refocusing is decreasing, it becomes advantageous for credit institutions to borrow from the national bank, which means that the interest on loans extended to the population is significantly reduced.

Thanks to the system of refinancing, the state controls the growth rate of inflation, not allowing the development of the process of depreciation of money. After all, when the refinancing rate is lowered to the minimum limit, the amount of money in circulation is actively growing, which means that the purchasing power is increasing. Uncontrolled progress of this process leads to a devaluation of money and a reduction in the supply of products in the market.