Bank of Russia goes further to make exchange-rate regime more flexi

13 September Bank of Russia publishes its draft "Guidelines of the Unified Public Monetary Policy for 2014 and the Period of 2015 and 2016". The Bank of Russia plans, like it did previously, to complete the transition to inflation targeting regime by 2015.

Based on a macroeconomic development forecast, the Russian Government and the Bank of Russia set target values for changes in consumer prices 4.5% in 2014 and 2015, and 4% in 2016. The Draft highlights that the target inflation level was established as a single value rather than a rage of values, thus allowing Central Bank's target priorities to be clearly transmitted to economic agents. At the same time, they set limits of 1.5 p.p. of acceptable inflation up-and-down deviations from the target value which may be caused by contingencies. In our opinion, given the current trends in the Russian economy, it is quite possible to achieve these inflation levels, but the inflation target will depend largely upon a global economic situation.

Bank of Russia intends to go further in an effort to make the exchange rate regime more flexible and by 2015 complete the transition to a flexible exchange-rate regime by reducing volumes of interventions aimed at leveling ruble exchange rate fluctuations, as well as increasing sensitivity of operational interval limits of sensitivity to the volume of completed Central Bank's interventions, making it necessary to develop a management system of exchange rate risk by economic agents. In 2013, the Bank of Russia has made a great progress in moving towards this direction, having repeatedly extended fluctuation limits of the ruble exchange rate.


The Draft specifies that the Bank of Russia will continue implementing measures to upgrade the system of monetary policy instruments with a view to increasing the effectiveness of the interest rate channel of the transmission mechanism. The operational target of monetary policy will be maintain overnight interest rates in the money market close to Bank of Russia's key interest rate. The regulator pinpoints that interbank lending will play the principal role in reallocating liquidity among market players. Furthermore, it should be noted that the interbank lending market in the Russian Federation is highly segmented, and in case of financial instability, it would be the Bank of Russia who will have to play the principal role of being the source of liquidity.

The Bank of Russia plans to make the 7-day repo auctions the principal regulation tool of bank liquidity. Interest rates will be maintained within the interest rate band by using overnight instruments with a wide spectrum of assets. It is expected that preconditions for discontinuance of daily auction-based overnight repos will be created as the money market develops.


To mitigate the issue of liquidity deficit at certain credit institutions, the Bank of Russia will continue auction-based operations not only with securities but also other types of assets, including non-market ones. In addition, the Bank of Russia may use purchase and sale of assets as liquidity regulation instrument.


Unification of interest rates on operations with the same terms, as well as transition to a single auction on refinancing operations with similar terms is a top-priority line for the development of Bank of Russia's system of monetary policy instruments.

The regulator considers the planned increase in the averaging factor of mandatory reserves as a measure aimed at enhancing credit institutions' capacity to efficiently manage liquid assets, thereby creating conditions for reducing interest rates volatility in the interbank market.

The regulator plans to carry out active communication strategy, including communication of Bank of Russia's goals and objectives and idea of measures to economic agents. Such a reporting by the Central Bank of Russia will facilitate building of trust in its monetary policy and influencing economic agents' expectations.


It should be noted that Bank of Russia's priority areas of activity set forth in the Draft will help improve functioning of the money market and result in better interest rates management and less volatility thereof. At the same time, it remains important for the Russian economy to enhance the financial sector's depth which promotes ‘long money' and economic activity.


Trunin P. V., Ph.D. in Economics, Head of Monetary Policy Department,
Bozhechkova A. V., a researcher.