Friday, September 13, 2013

Russia holds rate, signals steady policy, new 2014 rate

    Russia's central bank held its benchmark refinancing rate steady at 8.25 percent, saying it expects inflation to return to its target by the end of the year and continue to decline next year under the current monetary policy stance, signaling that rates are likely to remain steady.
    The Bank of Russia, which has held its refinancing rate steady since September 2012, also took a major step forward in its move toward an inflation-targeting regime on February 1, 2014, introducing a key policy rate within an interest rate corridor to manage liquidity in the banking sector.
    As part of the preparations for the new policy regime, the central bank cut the rate on overnight loans and one-day loans secured by non-marketable assets for 1 day to 6.50 percent from 8.25 percent and 6.75 percent, respectively, raised the rate on one-week deposit auctions to 5.50 percent from 5.0 percent, and auctioned loans, secured by non-marketable assets for 3 months with a floating rate.
    "This decision is based on the assessment of inflation risks and economic growth prospects and implies unchanged monetary policy stance," the central bank said.
    Russia's inflation rate was steady at 6.5 percent in August from July and has exceeded the central bank's 5-6 percent target range for 12 months. But the central bank estimated inflation at 6.3 percent as of Sept. 9 as it continues to decline due to an expected improvement in this year's harvest, which should push inflation to the bank's target by the end of this year. 

    "Given an unchanged monetary policy stance and a continuation of the current macroeconomic tendencies, inflation will continue to decline in 2014," the central bank said.
    In August a decline in food inflation was partially offset by higher gasoline prices and some regulated prices but "the absence of significant demand-side inflationary pressure with gross output staying slightly below its potential level is considered one of the factors fueling a decline in core CPI in recent months," the bank said.
    At the end of August,  the core inflation annual rate was at 5.5 percent.
    Russia's economic growth has slowed sharply in the last year and the central bank said growth of Gross Domestic Product decreased "substantially"  in the second quarter, mainly due to a decline in manufacturing and construction.  Consumer demand remains the main driver of growth and unemployment is still at a relatively low level, the bank said.
    "According to Bank of Russia estimates, the risks of persistently low economic growth continued to be related to subdued investment activity and sluggish recovery of external demand," the central bank said.
    Russia's GDP expanded by an annual 1.2 percent in the second quarter, down from 1.6 percent in the first quarter, continuing the decline seen in the last five quarters.
    The central bank forecasts growth of 2.4 percent this year, down from 3.4 percent in 2012.
    The Bank of Russia has been preparing to shift to an inflation-targeting regime next year and said one-week, auction-based operations will become the main policy instrument from Feb. 1, 2014 when its stops conducting one-day repo auctions on a daily basis and starts using 1-6 day repo auctions as a fine-tuning operation in the event of sharp changes in banks' liquidity.
    The rate on the new key policy rate, the one-week liquidity provision, is currently 5.5 percent.
    In the new interest rate corridor, the rates on one-day liquidity provisions and absorption standing facilities are set at an upper limit of 6.50 percent and a lower limit of 4.50 percent.
     "Standing facility liquidity provision operations will be conducted for one day only and collateralised by different types of assets (securities, credit claims, promissory notes, guarantees, gold, foreign currency). The single interest rate on these instruments will form the upper border of Bank of Russia interest rate corridor," the bank said.
    From Feb. 1, the bank will suspend all standing facilities for terms exceeding one day, along with Lombard loans for all terms and 3-12 month repo auctions.
    In addition to the main open market and standing facility liquidity operations, the bank will regularly conduct auctions for 3-month loans, with a floating interest rate that is linked to the key rate. Currently, the minimum spread on the key rate rate is 0.25 percentage points but this will also be set in the future.   


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