Institutional reforms will accelerate economic dynamics

On February 12 the Bank of Russia informed that it remained unchanged the refinancing rate and interest rates for its basic operations.

Note that at the beginning of 2013 an active discussion was held, whether the RF Central Bank should mitigate its policy by reducing interest rates. In our view, the position of the Bank of Russia, presented for the first time in the "Report on Monetary Policy", published in January 2013, is well-founded. The report demonstrates that at the present time significant deviations neither from the level of money emission from the potential level, nor from the monetary demand against its supply are irrelevant for the Russian Federation. In this situation, mitigation of interest rate policy would affect primarily prices, rather than emission.

At the same time, despite the accelerated inflation, tightening of monetary policy is also unjustified, as the growth rate of prices is mainly based on non-monetary factors.

We believe that the key instrument to accelerate the economic dynamics in Russia should be institutional reforms, as well as increasing the efficiency of budget expenditures and public administration. These measures can provide a significant incentive for economic development, while measures of boosting aggregate demand provide only a short-term positive effect, further provoking in the acceleration of inflation.

In addition to keeping interest rates at the same level, from March 1 the RF Central Bank unifies the mandatory reserves at the level of 4.25%, regardless of the types of liabilities. Recall that up to November 2009 over a long period of time mandatory reserves standard was the same for all types of liabilities. However, later the requirements to liabilities to non-resident legal entities have been increased more than to other liabilities. This differentiation was explained by the desire of the monetary authorities to discourage foreign loans by the banks.

Recently, however, due to the increased flexibility of the RF Central Bank exchange rate policy, relevance of this instrument has decreased. Moreover, we believe that the use of this instrument of monetary policy should be minimized, on the one hand, due to its scale (it affects all banks), and on the other hand, due to the lack of flexibility (uniformity of regulations provides different effects on banks in view of their size and structure of their liabilities).

P.V. Trunin, Ph.D. in Economics, Head of Monetary Policy Department