Refinancing rate downgrading

On September 29 the Bank of Russia has informed that since September 30 the refinancing rate is reduced again from 10.5 % to 10% per annum.

At the same time, the RF CB has decreased the interest rates on the instruments of liquidity provision to the banking sector and on the deposits attracted from credit institutions by 0.25 – 0.75 p.p. The Bank of Russia press release informs that the reason for the rate decline was a sustained reduction of inflation rate, as well as the need to encourage credit activity of commercial banks. Moreover, the RF CB has noted a significant reduction in devaluation expectations of economic agents.

Therefore, the Bank of Russia for the eighth consecutive time has mitigated the interest rate policy. The purpose of this measure is to encourage its credit and hence, economic activity in the country. However, it should be noted that currently the central banks of the leading countries are thinking of tightening, rather than mitigation the monetary policy, as the crisis is getting reduced. In particular, the central bank of Norway became the first agent of monetary regulation in Europe to raise interest rates. Therefore, further reduction of rates by the Bank of Russia will lead to a decrease in spread between interest rates in Russia and other countries. At the same time, it is worth to note that in case of continued growth in oil prices RUR will continue to grow.

A key factor enabling the Bank of Russia to decrease interest rates is a sharp deceleration of inflation. Apparently, as of October results, the consumer prices growth in Russia will again be zero. Therefore, in the near future inflation will continue to decline in annual terms, but in case of increase in national expenditures inflation can start to grow again. Consequently, in our view, the RF CB should be rather prudent in further interest rate downgrading.

P.V. Trunin, PhD, Head of Laboratory of Monetary and Credit Policy