The Bank of Russia Announces Changes in Rates

On 23 December, the Bank of Russia announced that, from 26 December 2011, the refinancing rate would be reduced by 0.25 p.p. - from 8.25% per annum to 8% per annum; interest rates on some lending standing facilities would also be cut by 0.25 p.p.; and interest rates on the Bank of Russia deposit standing facilities would be raised by 0.25 p.p.
However, the only actually reduced interest rates were those on Lombard credits and one-day direct repo transactions with a fixed repo rate. The announced cut in interest rates on 7-day direct repo transactions with a fixed repo rate and in interest rates on credits secured by non-market assets or guarantees for the term of over 6 months will have no impact on financial markets, because these transactions are now suspended. Thus, interest rates on direct auction-based repo transactions and credits secured by non-market assets or guarantees for the term of over 6 months have not been cut, although it is via these transactions that the RF Central Bank transfers most of its liquidity allocations to commercial banks.


Therefore we believe that the measures taken by the RF Central Bank are primarily designed to increase the effectiveness of its interest rate policy by narrowing the interest rate corridor for the rates used by the RF CB to influence financial markets. It should be remembered that, during periods of liquidity redundancy, an important role in determining interest rates in the interbank credit market is played by interest rates on deposit operations of the RF Central Bank, while during periods of liquidity deficiency, this role belongs to interest rates on the RF Central Banks' operations aimed at allotting liquidity to banks. A gradual reduction in the spread between interest rates on allotting liquidity and those on absorbing liquidity makes it possible for the Bank of Russia to more effectively control market interest rates.


P. V. Trunin, Candidate of Economic Sciences, Head of the Monetary Policy Department