The Bank of Russia continues to tighten the monetary policy

On 30 May the Board of Directors of the Bank of Russia decided to maintain the same level of interest rates of CBR on operations to provide liquidity to credit institutions. Simultaneously, the Bank of Russia increased its interest rates for deposit operations by 0.25 percentage point.

Thus, the CBR has actually continued tightening the monetary policy. Given the significant amount of liquidity in the banking system, which is demonstrated by significant balances of banks in the RF Central Bank, at the moment deposit rates are much more important for the banks than the interest rates on CBR loans.

Consequently, the Bank of Russia has increased its benchmark for market interest rates, at the same time reducing the spread between rates on loans and deposits, which will certainly enhance the effectiveness of its interest rate policy.

With the help of adopted measures, the Bank of Russia has reacted to the continued acceleration of inflation, which came to 9.7% in annual terms. Continuing high world oil prices increases the monetary component of inflation, as well as appreciation of the food products on world markets. Of course, at the beginning of this year there is a slowdown of money supply, which should reduce the monetary inflation in the future, but in the short term, in our opinion, the slowdown in inflation can occur only due to the seasonal price reduction on several food commodities in summer and autumn (especially in case of favorable weather conditions and a good harvest).

We believe that in this situation the CBR may require further steps to tighten monetary policy in order to contain inflation. At the same time, we note that instability of the economic recovery after a crisis imposes certain restrictions on raising interest rates in the medium term.

P.V. Trunin – PhD in Economics, Head of Monetary Policy Department