Bank of Russia Once Again Lowered Refinancing Rate

On April 29, 2010 the Bank of Russia announced that starting with April, 30 the refinancing rate is again reduced from 8.25% to 8% per annum. Simultaneously, the RF Central Bank has decreased by 0.25 p.p. the interest rates on instruments of liquidity to the banking sector and the deposits attracted from credit agencies.

According to a press release of the Bank of Russia, the reasons for the decline are practically the same as those reported before previous decreases in refinancing rate. For instance, according to the Bank of Russia, the reason was a steady trend for inflation reduction, as well as the need to encourage credit activity of commercial banks in order to provide for the economic growth.

At the same time the Bank of Russia noted increased risks for inflation acceleration in the second half of 2010. The possible growth of inflation pressure is accounted for by the “effect of the base”: in the second half of 2009 the inflation was observed to slow down considerably. This is undoubtedly so but, in our opinion, inflation risks will also be connected with fast expansion of monetary supply at the beginning of 2010. In such a situation the potential for further decrease of the rates is practically exhausted.

It should also be noted that recently the inflation has slowed down at higher rates than the refinancing rate of the Bank of Russia. Thu, the refinancing rates went up in rela terms. At the same time, as a result of liquidity reserves available for the banks the rates at the market of interbank crediting lowered below 4%. Consequently, the same as before the crisis, the Bank of Russia once again loses working instruments for monetary and crediting policy. And the main reason for this is the policy of the Bank of Russia at the market of foreign exchange, which supports ruble exchange rate. As a result, against the background of favorable foreign economic situation speculators get the opportunity to earn from the trend of ruble appreciation and the difference in interest rates.

In our opinion, such a rule for exchange rate policy does not contribute into the independence of monetary and credit policy of the Bank of Russia and transfer to inflation targeting. At the same time the necessity to maintain exchange rate is determined by the legislation on the Bank of Russia, which also creates institutional limitation to transfer to inflation targeting.

P.V. Trunin - PhD, Head of Department of Monetary Policy