Bank of Russia Reduces Refinancing Rate Once Again

On August 7, 2009 the Bank of Russia announced that starting with August, 10th the refinancing rate is reduced once again – from 11% to 10.76% per annum. At the same time the Bank of Russia lowers by the same percentage the interest rates on the instruments for provision the banking sector with the liquidity and the interest rates on the deposits attracted from the crediting institutions.

It should be noted that this time the Bank of Russia alongside with the announcement of the decision concerning the lowering of the rates has posted the come commentary on this decision on its site – the same as on July, 13th. For instance, in the press-release of the Bank of Russia it is mentioned that the reason for the decrease of the refinancing rate was the activity of the banks concerning the crediting of the real economy sector that is still low as well as the slow-down of the inflation. At the same time it is stated in the press-release that taking into account the preceding reduction in the rates as well as the slowdown of the inflation rates the Bank of Russia will further be more cautious when taking decisions on the changes in interest rates. Thus, for the fifth time in the row the Bank of Russia has softened the interest rate policy. The aim of this step is to promote crediting and consequently to stimulate the economic activity.

In spite of the fact that this measure is compatible with the international experience of anti-crisis policy we hold that the slowdown of the inflation has nearly ceased recently. Besides, considerable expenditures of the budget in the second half of the year can significantly increase the inflation pressure. In such a situation one can state that the potential for the decrease of the rates of the Bank of Russia is nearly exhausted at present. At the same time we believe that the stimulating potential of the interest rates decrease is limited at present since the main reason for the reduction in the volumes of crediting of the real sector is the uncertainty in the economic situation and the drop of borrowers’ incomes. In our opinion, the recovery of crediting will be the result and not the reason of the improved situation in the real sector.

P.V. Trunin – PhD, Head of the Department for Monetary and Crediting Policy