Refinancing by the Central Bank of the Russian Federation of credit institutions is used to effectively influence the lower sector of the banking system. By establishing the form, conditions and procedure for refinancing, the Central Bank controls the activities of commercial banks.
Refinancing is lending by the Central Bank to organizations (commercial banks), that is, credit institutions receive funds from it. There are two ways to do this: issuing loans and rediscounting securities held in banks' portfolios (for example, bills).
Rediscounting of bills is carried out at the rate of rediscounting. This is the official discount rate, usually slightly less than the loan (refinancing) rate. Thus, the Central Bank buys debt obligations at a lower price than commercial ones.
When the Central Bank raises the refinancing rate, commercial banks seek to compensate for the losses (since they take out a loan at a higher price) and themselves raise rates on loans issued to borrowers (legal entities and individuals). This impact on the economy is the main goal of refinancing. For example, when inflation rises, an increase in loan rates leads to a decrease in banks' lending operations. The liquidity of credit institutions directly depends on the ability to get a loan from the Central Bank.
Changing the refinancing rate of the Central Bank is a very powerful tool for influencing the economy, therefore it is rarely used. Since its change leads to significant consequences, sharp fluctuations in the rate indicate the instability of the economic system.
Any change in the official rate usually accompanies the transition to a new monetary policy. At the same time, commercial banks make the necessary adjustments to their activities, sometimes completely changing direction. The disadvantage of this method of influencing the economy can be called its weak efficiency in relation to other segments, it affects only commercial banks.
