The Bank of Russia Once Again Lowers the Refinancing Rate to 8.25% Annualized

On March 26, 2010, the Bank of Russia announced that the refinancing rate would be lowered again, from 8.5% to 8.25% annualized, effective as of March 29. At the same time, the CBR lowered by 0.25 p.p. a string of interest rates on instruments of provision of liquidity to the banking sector and deposits attracted from credit institutions.
The cited in the CBR’s press release reasons behind the move do not drastically distinct from those heralding the previous decreases of the rates. More specifically, according to the Bank of Russia, the cause for the decrease of the rates became a steady trend to inflation deceleration and the need for filliping commercial banks’ lending operations to boost the economic growth renewal. As well, the CBR emphasized that lower interest rates would help inhibit the inflow of short-term foreign capital.

So, it is the eleventh straight time that the CBR softens its interest policy. The key factor enabling the Bank of Russia to lower interest rates is inflation deceleration vs. the prior year. Specifically, as of March 22, the CPI stood at 6.9% in annual terms, down 7.2% since late February. But the continuous growth of money supply and the base effect (inflation rates have began to fall rapidly since April 2009) can result in discontinuation of the fall in inflation rates in annual terms. At such juncture a potential further drop of the rates is unlikely to exceed 0.5-0.75 p.p.

Let us also note that inflation has recently been slowing down at a pace faster than the speed with which the CBR was lowering its interest rates, so the latter have been increasing in real terms. Meanwhile, because banks have accumulated a sizeable amount of cash, the interbank lending rates dipped below 4%. So, like in the pre-crisis time, the CBR has once again found itself deprived of effecient monetary policy levers. The reason for this lies in the Bank of Russia’s policy on the forex market – the CBR sells/buys some USD 700m at each resistance level by the bicurrency market and consequently shits the level by Rb. 0.05. Consequently, on the background of a favorable situation in the foreign trade area speculators seize on any opportunity to ride a gravy train of the trend to appreciation of the Rb and spreads between interest rates. We believe such a forex policy pattern does not help bolster independence of the CBR’s monetary policy, nor it can fuel transition to inflation targeting.

P.V. Trunin, Head of the Department of Monetary Policy