The Bank of Russia has informed on another downgrading of refinancing rate

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 seventh 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. At the same time, it should be noted that currently the central banks of the leading countries are contemplating of tightening, rather than mitigation the monetary policy, as the crisis is getting reduced. Further inflation decline in Russia is also not obvious. In particular, significant budget expenditures at the end of the year could increase inflation pressure. Moreover, in autumn the price for fruit and vegetables will grow. In such situation one can expect that the potential for the RF CB interest rate decline is now largely exhausted.

However, we believe that the Bank of Russia can still afford further interest rate downgrading, which could urge revival of credit activity. At the same time, in our view, the resumption of credit activity will result primarily in improvement in the real sector, rather than its background. At the same time, further rate reduction will again bring the real interest rates in the RF to negative rate, making it difficult to conduct monetary policy in the future, and may again contribute to the formation of "gaps" in the Russian financial market.

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