Low inflation should become a priority task for the Central Bank
In the meantime, interest rates on certain long-term refinancing operations were reduced by 0.25 p.p. on May 16. In particular, interest rates on loans secured by gold or non-market assets or sureties, as well as minimal interest rates on auctions for liquidity providing for 3 and 12 months were reduced by the same value.
Thus, though the Central Bank of Russia reduced technically its interest rates, it should be noted that no changes were made to overnight repo operations, the principal instrument of refinancing. It is to be recalled that the same rates were already reduced by the same value on April 3.
The changes in the Central Bank's interest rates are basically intended to enhance the effectiveness of its interest rate policy by narrowing the corridor of interest rates which the Bank of Russia uses to influence financial markets. In addition, by doing so, the Central Bank of Russia is trying to reduce long-term interest rates in order to cut the cost of long-term loans issued by commercial banks to the real sector.
It is well known, however, that the spread between short- and long-term interest rates reflects largely the expected inflation rate and investment risks. Given the situation, the Bank of Russia should set its priority task to lower inflation and enhance the effectiveness of the Russian banking system whose key task is transform ‘short' liabilities into ‘long' assets. To mitigate business risks in Russia, the Russian Government should ensure that transparent and efficient institutions operate in the country. Then, and not until then, will long-term investment projects become attractive for investors.
Trunin P.V. - Ph.D. in Economics, Head of Monetary Policy Department