The Bank of Russia Raised Interest Rates

On January 30, 2009, the CBR announced that since February 2 it would raise interest rates on the most popular instruments of provision of liquidity to commercial banks. More specifically, the interest rates on collateral loans for 1 and 7 days is increased from 10 up to 11% annualized, while those for the term of 30 days – from 10.25 up to 11% annualized. The interest rate by direct REPO transactions is also increased from 10 to 11% annualized, while that by asset-backed loans –  from 11 to 1.25% annualized.

Underlying the rise in interest rates is the CBR’s willingness to raise the value of resources credit institutions borrow from it to invest in forex-denominated assets. As a reminder, since January 23, the CBR has set the upper margin of the technical corridor of the bicurrency basket at the level of Rb. 41/1USD and announced its readiness to maintain the Rouble’s rate at this particular level for at least several months. Meanwhile, by January 30, after the period of tax payment was over and banks had Rouble-denominated liquidity available, the value of the bicurrency basket already exceeded Rb. 40. Given that back in November, the value of the bicurrency basket was under Rb. 30, the national economic agents have found out that buying forex is a very good investment. Expectations of depreciation of the national currency are fueled by low oil prices that affect the size of forex revenues flow into the country.

At this juncture, the CBR decided to constrain the banks’ possibilities to buy currency by increasing the costs of attraction of Ruble-denominated resources. We believe this move is fairly grounded; however, raising interest rates at 1 p.p. on average appears an insufficient measure to discourage banks from buying forex, as the rate of return on such deals under the current depreciation rate of the ruble is over 100% annualized . Meantime, with such a move the CBR displays its eagerness to keep the declared rate of the national currency, which may further discourage economic agents from buying forex and contribute to a players’ lower activity on the forex market. Plus, our estimates show that should the Ruble rate be around Rb 40/1USD, that would allow one to get export and import balanced (with account of foreign debt repayments).

P. Trounin, Head, Department of Monetary and Credit Policy