Another reduction of refinancing rate

On November 24, 2009 the Bank of Russia has announced that from November 25, the refinancing rate is reduced again, from 9.5 to 9% per annum.

Simultaneously, the RF Central Bank has reduced the interest rate on instruments of liquidity for the banking sector and the deposits attracted from credit institutions by 0.5 percentage points.

It is stated in a press release of the Bank of Russia that the reason for the rate reduction was a steady downward trend in inflation, as well as the need to encourage credit activity of commercial banks. In addition, the Central Bank of Russia has noted, that the decrease in interest rates will help to reduce the gap between the interest rates of the Russian Federation and abroad, slowing down the strengthening of the ruble as a result of short-term capital inflow.

Therefore, for the ninth consecutive time, the Bank of Russia has mitigated the interest rate policy. That move is aimed at encouraging national credit, and hence, economic activity, as well as at discouraging the inflow of short-term capital to the country. The key factor enabling the Bank of Russia to reduce interest rates is a sharp deceleration of inflation. However, as of the late November results, after three months of stagnation, the consumer prices started to grow again. Moreover, large-scale budget expenditures, expected in December could accelerate the inflation in early 2010. In the near future, inflation is likely to be further declined in annual terms. At the same time, its potential for further slowing down is largely expired. At the end of 2010, the CPI in Russia is unlikely to be below 8-9%. In this situation, the RF CB should be careful about further interest rate downgrading.

P.V. Trunin - Ph.D., Head of Laboratory for Monetary and Credit Policy