Key interest rate to become main indicator of the monetary policy

In particular, the Central Bank of Russia announced that it would lower the interest rate on overnight loans and overnight loans secured by non-market assets or guaranties (sureties) down to 6.5% p.a. and increase the maximum interest rate on 7-day auction-based deposit operations up to 5.5% p.a., keeping unchanged interest rates on other Bank of Russia's operations and refinancing rates. Furthermore, the system of monetary policy instruments was complemented with auction for the provision of loans secured by non-market assets at a floating interest rate with a maturity of 3 months.

It is important to note that the Bank of Russia made a decision to introduce a monetary policy key interest rate by unifying interest rates on the 7-day auction-based liquidity-providing and liquidity-absorbing operations (5.5% p.a. as of September 13, 2013). The regulator intends to use the key interest rate as principal directional indicator of its monetary policy. A minimum spread of 0.25 p.p. was established against the key interest rate on the 3-month credit auctions. It should be noted that the 7-day repo rate will be remain the key interest rate within the transition period. Fr om January 1, 2016 the refinancing rate, which is playing a secondary role for a time being, will be adjusted to the key interest rate level.

 

Interest rates on Bank of Russia's continuous overnight liquidity-providing and liquidity-absorbing operations form a lower (4.5% p.a. as of September 13, 2013) and upper (6.5 % p.a. as of September 13, 2013) limits of the interest rate band, symmetrical against the key interest rate. It should be noted that when the Bank of Russia makes decision to change the key interest rate level, the interest rate band lim it will be automatically shifted by the same value.

 

It should be noted that the foregoing measures seem to be logical in general in the context of transition to inflation targeting regime. The introduction of key interest rate as principal monetary policy indicator is most important. It is to be recalled that up until now the Central Bank of Russia has used numerous instruments of liquid management at different interest rates. Unification of these interest rates will make the monetary policy more transparent.

 

It is important to note that the Bank of Russia has chosen the 7-day repo operations as key interest rate, whereas at present the principal volume of refinancing for banks is based on overnight instruments. To outward seeming, the Central Bank of Russia plans to gradually increase terms of liquidity provision and use overnight instruments only in case of emergency.

 

Trunin P. V., Ph.D. in Economics, Head of Monetary Policy Department,

Bozhechkova A. V., a researcher.