The Budget is Increasingly Influencing CBR policy

RUSSIA ENERGY / FINANCE - Report 01 Apr 2016 by Leonid Grigoriev and Marcel Salikhov

The CBR decided to leave the key interest rate unchanged at its March meeting despite a substantial decrease in inflation and the recent rise in oil prices. At the same time the monetary authorities reconsidered their baseline macroeconomic forecasts. In their baseline scenario the average annual Urals oil price is expected at $30 per barrel, and the decline in GDP is expected to be 1.3-1.5% in 2016.
One of the key reasons for the Bank’s remaining on hold was that monetary policy has already weakened, and interest rates have almost reached the floor of the policy rate corridor because of the increased budget deficit and liquidity inflow.
So the fiscal deficit is increasingly influencing monetary policy. We believe this trend will continue in 2016. The Ministry of Finance is financing the deficit at the expense of the Reserve Fund while debt financing is negligible. The main counteractive vehicle of “emissive” financing of the deficit is the reduction of banks’ refinancing amounts from CBR.
The fiscal deficit within a 2-2.5 trillion RUB range may be “sterilized” by a decrease in the refinancing instrument volume from the CBR. A higher deficit will require additional deposit absorption. At some point this year, the banking system will turn to a structural fiscal surplus. According to CBR policy, deposit instruments will be the key interest rate policy tool in this case.
In general, this means that the CBR will keep monetary policy tight in comparison with other ways of funding the deficit. We believe that for these reasons the monetary authorities stated that “…the Central Bank of the Russian Federation will probably carry out a moderately tight monetary policy for a longer period of time than previously anticipated”. On the other hand, it means that the volume of deficit is a restraining factor for the Ministry of Finance, which has to take into consideration the CBR policy.

Now read on...

Register to sample a report

Register