The Bank of Russia May Cut Its Rate of Refinancing to 8%

In 2015, the RF Central Bank will fully switch over to inflation targeting, and so will cancel the currency corridor.


The ruble’s exchange rate will fully depend on how the macroeconomic situation and the energy carrier market will be changing, and also on capital flows.

At present, capital outflow from Russia compensates for the currency inflow generated by hydrocarbon exports, thus helping the Bank of Russia in its efforts to do away with the problem of the ruble’s strengthening.

If capital outflow gives way to a capital inflow, or if the situation on the raw materials markets becomes worse, the exchange rate of the ruble in regard to the bi-currency basket may alter significantly.

The reason for cancelling the currency corridor is that the RF Central Bank intends to reduce its influence on the financial market. It is not a secret that the CB’s support for the ruble on the currency market represents the principal emission mechanism applied by the RF Central Bank, and it has been effectively operating for the past decade. Now, finally, the Bank of Russia abandons that mechanism. Its new mechanisms will be expansion of operations with ruble-denominated securities on the open market and providing banks with various forms of liquidity.

The RF Central Bank’s goal is to maintain the inflation rate at a lower level than it is now. The full-year inflation index will exceed its forecasted value published by the RF Ministry of Economic Development early this year. We estimate that towards the year’s end the inflation rate will be 7%. Its growth this year has been triggered by two major factors: the rising tariffs set by natural monopolies and the food crisis caused by drought in some regions of the world.
In order to compensate for the inflation-linked risks, last summer the Bank Russia raised its rate of refinancing to 8.25%. However I believe that these two pro-inflationary factors will dwindle towards the year’s end, and then the RF Central Bank may decide to bring the rate of refinancing down to 8%. Perhaps this will happen as early as November – December 2012.

S. M. Drobyshevsky - Doctor of Economic Sciences, Director of the Center for Macroeconomics and Finance