As you know, banks normally need someone else’s money to make a living, since their own net worth generally amounts to only 15-20% of their assets. The rest is lent out money.

They borrow from the population, different enterprises, foreign banks, the Central Bank and other banks of a country. After that, they make money on a margin between an interest fee for borrowed funds and an interest fee for granted loans.

Banks constantly analyze many characteristics of the money market, namely, at what interest rate market players borrow money from the Central Bank, at what rates banks lend to their customers, at what rate they can borrow from foreign banks, what their competitors rates are, etc.

And inflation forecasts are one of the most important points in this matter.

The Central Bank among others also produces inflation forecasts. It is obliged by law to assess annually the future scenarios of economic development, including such indicators as inflation, interest rates, international reserves, the balance of payments outputs of a country, exchange rates and so forth.

When commercial banks set interest rates on loans, they take into account the average interest rate at which their funds raised were borrowed, plus the banks add a margin (that is, staff, rent and equipment costs, as well as all risks and a profit margin).

Moreover, the interest rates on loans granted by commercial banks to customers are supposed to cover the loss caused by inflation without being significantly higher than their competitors’ ones at that.

That’s why when interest rates on deposits amount to 8-9% and inflation is 6.5%, real (effective) interest rates on loans usually exceed 30%, although nominal rates may amount to only 13-16%.

The thing is that banks disguise the remaining part of the real (effective) interest rate as various additional commissions. That’s how banks “hide” those real rates.

You should be in no doubt that with a significant increase in inflation and change in operational circumstances on the market, banks will increase total loan payments.

The question is whether this will be an increase in nominal rates or charging for additional commissions. But it’s just a matter of marketing.