The Bank of Russia Does not Change the Interest Rate. However It Raises Reserve Requirements

On 25 March the Board of Directors of the Bank of Russia took a decision to preserve unchanged the interest rates on attraction and placement of liquidity.

At the same time, the Bank of Russia voted to raise reserve requirements:
  • On obligations of credit organizations to non-resident legal entities in Rubles and in foreign currency – fr om 4.5% to 5.5%;
  • On obligations to individual persons and other obligations of credit institutions in Rubles and in foreign currency – from 3.5% to 4%.

Let us recall, that this is the third increase of reserve requirements, which took place this year. With the help of these measures, the Bank of Russia has reacted to the high level of inflation, which reached nearly 9.5% annually. Political events in Africa and Middle East have provoked a new rise of oil prices, which can lead to additional inflow of hard currency to the Russian Federation. In the event the Bank of Russia purchases foreign currency to add to its international reserves, this activity may provoke a new surge of inflation.

We believe that in these circumstances the Central bank of the Russian Federation could well raise the interest rates, especially given the continued capital outflow from the country. In addition, further restriction of the operations of the Bank of Russia in the foreign exchange market would be the effective measure to lim it money supply. Purchase of currency to add to the reserves will lead to an increase of monetary base.

P.V. Trunin – Candidate of Sciences (Economics), Head of Monetary Policy Department