The central bank hardens the terms of provisioning FX resources

The Bank of Russia has made a decision, effective since 21 April 2015, to increase minimum interest rates at FX repo auctions by 0.5 p.p. to the LIBOR plus 2 p.p. for a term of one week and 28 days and 2.5 p.p. for a term of 12 months.

Furthermore, the regulator increased minimum interest rates at auctions for loans denominated in foreign currencies secured by claims on loans denominated in foreign currencies to the level of LIBOR plus 2.25 p.p. for a term of 28 days and 2.75 p.p. for a term of 365 days. Like in the case of the previous increase in interest rates, the value of 1-year loans has since 13 April been increased considerably (up 0.75 p.p.) compared with loans for a term of 28 days and one week (up 0.5 p.p.).

As a reminder, FX refinancing instruments at a relatively low interest rate were initially introduced in response to the feverish demand for foreign currencies by banks, individuals and corporations in November – December 2014, except that refinancing through repo operations was based at the LIBOR plus 0.5 p.p., and 0.75 p.p. for loans denominated in foreign currencies. The central bank began to increase the value of FX refinancing as the situation in the foreign exchange market stabilized, and the recent increase in interest rates is the third in the last month.

The increase in interest rates on the provision of foreign-exchange resources is intended to discourage banks to invest such funds in assets denominated in foreign currencies and rubles to get higher returns. At the same time, the Russian central bank tends to use these instruments to achieve the key objective of preventing panic sentiments in the foreign exchange market, as it successfully did in the period of January-February. Banks' above-normal accumulation of foreign-exchange debts owed to the central bank tend to raise FX risks for banks as well as enhance the likelihood of a weaker ruble when loans are matured.

This measure will prevent the ruble from above-normal strengthening driven by not only fundamental factors, but also investors' optimism about the state of Russia's economy and geopolitical situation. Furthermore, the Bank of Russia may, if appropriate, ease the terms of provision of FX resources.

Aleksandra Bozhechkova, the Head of Monetary Policy Department