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EBRD welcomes Russian Central Bank interest rate initiative

Plan to offer longer term money at a floating rate seen as key for inflation targeting

Author(s):Richard Wallis
Date:31 October 2012

The EBRD welcomes the decision of the Central Bank of Russia (CBR) to change the way interest rates will be set for longer term liquidity to be provided to local banks, hailing it as a move towards a more transparent and effective refinancing system, as well as a key step towards achieving its goal of shifting to inflation targeting.

This follows the recent unveiling of a CBR plan to launch 1-to-12 month floating rate refinancing instruments linked to the RUONIA rate in the first quarter of 2013. Until now banks could only access fixed rate CBR funding with longer maturities deemed both expensive and inflexible.

The EBRD has been actively promoting and participating in the creation of a transparent interest rate setting environment in Russia for many years and sees this change in policy as a very positive step.

Due to the fact that the RUONIA rate is set by market participants on the basis of a vast amount of actual overnight lending transactions, it is far less prone to market manipulation than indices reflecting indicative levels.

The EBRD called the CBR’s choice of the RUONIA index for this move a very positive step in the promotion of an efficient money market mechanism. Use of the rate as an operational benchmark for the CBR would be further strengthened once RUONIA-linked refinancing facilities were launched next year – with RUONIA emerging as the single most accurate measure of rouble overnight interest rates.

The Bank expressed confidence that the move would increase the need for RUONIA-linked derivatives as banks borrowing from the CBR under the floating RUONIA rate would seek to hedge their exposure to fixed rate assets by entering into swaps.

This would lead to a deepening of the existing derivatives market in RUONIA indexed Overnight Index Swaps (OIS), it added. In turn, this index would become the main barometer of interest rate expectations in the rouble market.

The shift should also increase demand for longer-term refinancing through the CBR and improve liquidity in the banking system. The previous rules made long-term borrowing at a fixed rate unattractive since the interest rate differential between overnight and one-year money was around 250 basis points.

Most operators therefore chose to borrow overnight money at a floating rate and roll it over every day, driving down demand at the CBR’s auctions of one-year money.

Finally, the EBRD said it saw the CBR move as a first step in targeting inflation by the central bank, adding it was eventually expected to narrow the interest rate band in order to reduce volatility in rouble short-term interest rates.

The Bank said this was consistent with the CBR’s stated intention of widening the rouble corridor on the foreign exchange market so as to allow the currency to free float completely by 2015.

Such a move will contribute to the stabilisation of volatility in the RUONIA rate, a development which will create the conditions for improved forecasting and planning of longer-term investments in the wider Russian economy, it added.

The EBRD has long been an active participant in the development of a competitive and transparent market for rouble funding. The EBRD is a member of the expert council of Russia’s National Foreign Exchange Association (NFEA) and actively promoted the development of the MOSPRIME rate launched in April 2005.

The Bank similarly promoted the calculation of the RUONIA index launched in September 2010 with the EBRD trading immediately thereafter the first ever rouble Overnight Index Swap. ROISFIX was launched as an index of fixed interest rates versus RUONIA in April 2011 and in July the EBRD concluded a loan based on this new index, also a first for the rouble market.     


Last updated 31 October 2012

Richard Wallis
Moscow - Tel: +7495 787 1111

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