The Bank of Russia has Announced a New Reduction of the Rate of Refinancing

On May 31, 2010, the Bank of Russia has declared that starting from June 1 the rate of refinancing will be decreased from 8% to 7.75% per annum.


Simultaneously, the Bank of Russia reduced by 0.25 percentage points the interest rates on instruments of liquidity provision to the banking sector. At the same time, the interest rate on overnight deposits remained unchanged, while that on “tom-next” deposits, “spot-next” deposits and demand deposits fell by 0.25 percentage points. Interest rates on “one-week” deposits and “spot-week” deposits decreased by 0.5 percentage points. 

The reason for such a decision by the Bank of Russia (published in its press-release) does not differ much from that which was stated before the previous reduction of interest rates. In particular, according to the Bank of Russia the factor behind such a reduction was a declining rate of inflation, as well as the need to encourage renewal of the sustained economic growth. At the same time, the Bank of Russia believes that interest rates are likely to be preserved at that new level.

It is to be noted that the Bank of Russia believes that the risk of the growth in the inflation rate in the forthcoming months is not very high. Certainly, considering inertia of inflationary processes and seasonal slowdown of the rate of inflation in summer and early in autumn in the short-term prospect the inflation rate in Russia is likely to remain at the same level. However, such a rapid expansion of the money supply as has been registered for over six months is likely to trigger a higher inflation rate in the second half of 2010. When that happens the Bank of Russia will not be much in a position to sterilize excessive liquidity through reduction of such an extent of lending to the banking sector as has grown during the crisis. In such a situation, further reduction of interest rates may be unjustified. It seems the Bank of Russia takes the same view on that matter because interest rates on overnight deposits which are a kind of reference for interest rates on the interbank landing market remain unchanged.

P.V. Trunin, PhD (Economics), Head of the Laboratory of Monetary and Credit Policy