The CB’s policy rests on trading off between inflation targeting and support to lending

The monetary policy is varying in configuration.

On the one hand, the monetary policy has been retched up: since earlier last year the central bank has gradually and then abruptly increased the key interest rate. On the other hand, liquidity has been provided to the banking system for the past few years.

The central bank allots to banks as much as they need to be able to maintain their liquidity at a adequate level. The 2014 dynamics: record high Rb 3,5 trillion less foreign-currency loans, making it more than in 2008. A tough monetary policy is not even in the question given the circumstances. It is the author's opinion that the priority of supporting liquidity in the banking sector without limits on FX operations has become the key factor of the devaluation in the past year. The foreign exchange market regulation through bank liquidity didn't work. It is this scheme that was among the factors that boosted the devaluation, and hence ramped up inflation.

The latest, in March, cut of the key interest rate to 14% below the accumulated inflation (about 17%) seems to have resulted from certain tradeoffs in the central bank policy. The interest rate cut to 14% from 15% p.a. can hardly stimulate a rapid economic recovery, but this is a guide for interest rates to move without looking at inflation dynamics.

Should the long announced guidelines for switching to an inflation targeting regime be followed, it might be reasonable to maintain for some time interest rates at a positive level in real terms in order to make savings in the national currency more attractive.

Regarding the central bank policy in the foreign exchange market, the CB provides no support to the ruble exchange rate. It is well known that when a drastic depreciation of the ruble has to be smoothed, the Bank of Russia tends to undertake foreign currency interventions, taking away liquidity and providing banks with extra ruble-denominated assets to maintain a safe level of bank liquidity. Should this scheme remain unchanged, any insignificant movements in the foreign exchange market would result in faster growth in the exchange rate, as was the case in December, and further spinning up of the inflation and devaluation spiral.

Mikhail Khromov, the Head of Gaidar Institute's Center for Structural Research.