BOFIT Viikkokatsaus / BOFIT Weekly 2019/45

Maintaining price stability will remain the top monetary policy priority for the Central Bank of Russia in coming years. This means, in practice, the active pursuit of an inflation target of around 4 % p.a. The main monetary steering instrument remains the CBR key rate (7-day repo rate).

The basic mechanism for implementing monetary policy also remains the same. The CBR will try to keep overnight lending rates on the interbank market close to the CBR’s key rate. Money market rates will be guided by absorbing or injecting liquidity into the banking system. In recent years, the CBR has dealt with excess liquidity largely through deposit auctions and the issuance of Bank of Russia bonds. The CBR plans to retain this approach.

Overnight standing facilities that banks can use on a daily basis are used to restrict fluctuations in money market rates. The rates of the overnight standing facilities for absorbing and providing liquidity define the interest rate corridor of the CBR (it has been key rate ±1 % for the key rate’s entire existence). This steering mechanism has remained in place since end-2013. The CBR notes that steering mechanisms do not require quantitative targets for monetary aggregates.

Based on the CBR’s forecast, banks in coming years are likely to experience an increase in their structural liquidity surplus that will boost their deposits in the CBR considerably. Some of this increase will be due to the CBR’s daily forex purchases on the domestic forex market. These purchases are fulfilment of forex orders from the finance ministry. According to the government’s fiscal rule, it needs to convert the excess earnings from oil taxes into foreign currencies that then go into the reserve fund.

At the same time, the CBR expects its foreign currency and gold reserves to increase quite substantially. In addition to forex buying, the CBR plans to purchase to the reserves more gold, which already makes up about a fifth of its reserves.

The CBR noted that besides monetary policy also other factors can occasionally cause price fluctuations. These factors include changes in food prices, the ruble’s exchange rate and official decisions concerning administratively regulated utility rates.