A new Chairwoman of the Central Bank of Russia will ensure consistency of the monetary policy course

On April 9, the State Duma approved Elvira Nabiullina as the Chairwoman of the Bank of Russia. In her speech she outlined a few milestones of a new monetary policy. The general idea of the speech is as follows: the new Head of the Central Bank of Russia will adhere to the previous balance between stimulating and inflation policy.

On the one hand, Elvira Nabiullina stated that the key objective of the Bank of Russia is to lower the inflation rate down to 3-4%. In practice it means that the Central Bank of Russia will make no radical changes in the monetary regime and continue to follow the strategic course aimed at transiting to inflation targeting. Nobody should expect the regulator to be forced by lobbyists and move to aggressive monetary injection ignoring price stability against slow down in economic growth.

On the other hand, Elvira Nabiullina believes that the Central Bank of Russia “should not separate itself from the need for economic growth and employment” and inflation mitigation rates “must be dictated by economic conditions”. In other words, the regulator will relax the monetary policy as soon as the first serious signs of cyclic breaking emerge. Furthermore, the monetary authorities have no intention to shrink money supply for the sake of intensive mitigation of inflation rates by suppressing economic activity. This a positive signal too.

Thus, as was expected, the new head of the Central Bank of Russia will ensure consistency of the monetary policy course.

Another good news is that Elvira Nabiullina tends to improve the effectiveness of supervision over financial institutions and enhance macro prudential regulation mechanisms. A lesson learned from the global financial crisis was that monetary authorities should not focus exclusively on inflation and smoothing of cyclical fluctuations. Their top-priority objectives should include stability in the banking sector. It is very good that the Bank of Russia is going to further develop regulation procedures in that direction.

A Central Bank’s critical task is to develop a new money emission model. Therefore, a special emphasis should be placed on a proposal made by Nabiullina to qualitatively and quantitatively extend refinancing operations. Relaxing the collateral requirements for Central Bank loans should become a key change. In particular, securities issued by private issuers and securitization bonds issued by real sector enterprises have been suggested to be admitted as collateral. An adverse effect of these new measures is that the Bank of Russia will have to assume some of the investment risks, which relates to fiscal rather than monetary policy. On the other hand, given a hard segmentation in the interbank market, such an extension in refinancing may make the banking sector less vulnerable to liquidity shocks. At the moment, it is hard to be precise as to whether the extension of refinancing is needed and desirable unless more details of future changes become available.

Goryunov E.L. – researcher, Monetaryl Policy Department