Monetary policy in the environment of recovery: Russian experience
Alexander Kashturov Head of Market Operations Department Bank of Russia
Prior to the financial crisis
Economy: – Increasing oil prices and capital inflow – High growth rates of the Russian economy – Foreign debt accumulation by private sector Monetary policy: – Exchange-rate oriented – Building-up of FX reserves and rapid M2 growth – Interest rate policy plays subordinate role (“impossible trinity” problem) 2
During the stress phase of the crisis
Economy: – Deep recession: GDP fell by 7,8% in 2009 – Capital outflow and foreign debt refinancing problems in private sector – The ratio of nonperforming loans to total loans reached 6,5% by the end of 2009 (1,5% before the crisis) – Drop in domestic assets prices
Monetary policy: – Restoring financial stability was the main goal of monetary policy – Wide range of measures (next slide) 3
Monetary policy response to the crisis
FX policy – Massive FX interventions and gradual devaluation of the rouble » FX reserves dropped by around $200 bln during the period from Sept. 2008 – Jan. 2009 » Nov. 2008 – Jan. 2009: the period of RUB gradual devaluation via widening of the dual-currency boundaries. Introduction of the floating operational band
– Special USD credit line to refinance corporate foreign debt
Interest rate policy – Increase in interest rates aimed at preventing capital outflow as well as reducing inflation risks – The BoR started easing cycle only in April 2009 4
Monetary policy response to the crisis
Liquidity injections – Subordinated loans to certain banks (both from budget and the BoR) – Unsecured loans (since Oct. 2008 till Dec. 2010) – Widening of collateral base and longer maturity (up to 1 year) for traditional refinancing instruments – Reduced reserve requirements
Special resolution measures in cooperation with Deposit Insurance Agency 5
Russia Brazil India China
03.2012
12.2011
09.2011
06.2011
03.2011
12.2010
09.2010
06.2010
03.2010
12.2009
09.2009
06.2009
03.2009
12.2008
09.2008
06.2008
03.2008
12.2007
09.2007
06.2007
03.2007
ď ą
%
GDP growth rates Russian economy was severely hit by the crisis in 2008-2009 Quarterly GDP, YoY
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
6
GDP growth rates
2008
Latvia
Estonia
Denmark
Sweden
Finland
Lithuania
Poland
6 4 2 0 -2 -4 -6 -8 -10 -12 -14 -16 -18 -20
Russia
%
GDP, YoY
2009 7
Balance of payments Significant capital outflow in the 4th quarter of 2008 created pressure on rouble
Current account Net errors and omissions Change in FX reserves
I Q 2012
IV Q 2011
III Q 2011
II Q 2011
I Q 2011
IV Q 2010
III Q 2010
II Q 2010
I Q 2010
IV Q 2009
III Q 2009
30 II Q 2009
-150 I Q 2009
50
IV Q 2008
-100
III Q 2008
70
II Q 2008
-50
I Q 2008
90
IV Q 2007
0
III Q 2007
110
II Q 2007
50
I Q 2007
130
USD bn
100
USD/barrel
ď ą
Capital and financial account Average oil price (URALS) (rhs)
8
Banking sector foreign assets and liabilities ď ą ď ą
Before the crisis foreign liabilities exceeded foreign assets BoR interventions during the period of gradual devaluation allowed the banking sector to eliminate its foreign A&L mismatch by the end of 2008 230 210
170 150 130 110
Foreign assets
Foreign liabilities
05.2012
03.2012
01.2012
11.2011
09.2011
07.2011
05.2011
03.2011
01.2011
11.2010
09.2010
07.2010
05.2010
03.2010
01.2010
11.2009
09.2009
07.2009
05.2009
03.2009
01.2009
11.2008
09.2008
07.2008
05.2008
03.2008
90 01.2008
bln. USD
190
9
BoR refinancing operations ď ą
The scale of the BoR main refinancing operations has increased during the crisis
4000 3500
2500 2000 1500 1000 500
REPO operations Lombard credits and others
Unsecured loans Subordinated loan to Sberbank
04.2012
01.2012
10.2011
07.2011
04.2011
01.2011
10.2010
07.2010
04.2010
01.2010
10.2009
07.2009
04.2009
01.2009
10.2008
07.2008
04.2008
0 01.2008
RUB bn
3000
FX swap
10
Reserve requirements BoR provided additional liquidity to banks by reducing reserve requirements 900 800 700 600 500 400 300 200 100
16.09.11
14.07.11
26.04.11
01.02.11
23.11.10
30.08.10
04.06.10
10.03.10
07.12.09
11.09.09
19.06.09
24.03.09
18.12.08
24.09.08
02.07.08
04.04.08
0 09.01.08
bln. RUB
ď ą
Reserves averaged-out on the banks' corresponding accounts in the CBR Reserves blocked on a special account
11
Money market interest rates
Interbank market O/N rate (MIACR) BoR REPO rate Bicurrency basket (rhs)
BoR stand-by deposit rate BoR refinancing rate
12.2008
15
09.2008
0
05.2008
20
02.2008
5
10.2007
25
07.2007
10
04.2007
30
12.2006
15
09.2006
35
06.2006
20
02.2006
40
11.2005
25
08.2005
45
04.2005
30
RUB
The ability of BoR to control market interest rates before and during the crisis was restrained by the FX policy goals
01.2005
%
ď ą
12
The period of economic recovery
Russian economy underwent slow but stable recovery in 2010 – 2011 – Negative output gap has closed by the end of 2011
The economy is driven by the consumer sector which is supported by tight labour market conditions, fiscal stimulus and credit expansion Favorable oil market conditions are balanced out by persistent capital outflow 13
Monetary policy in the environment of recovery
BoR started normalizing monetary policy as the stress phase of the financial crisis was over: – Lowering policy interest rates to support economic recovery » The easing cycle lasted from April 2009 till June 2010
– Unwinding non-standard measures such as unsecured loans and longer-term operations – Increasing RRRs to rebuild liquidity chest
At the same time BoR started to enhance its monetary policy and move towards price stability as the main policy objective 14
Monetary policy in the environment of recovery
In the next three years BoR will complete transition to inflation targeting
In order to facilitate the transition BoR works in several directions – Increasing flexibility of the exchange rate policy – Improving interest-rate policy – Increasing monetary policy transparency 15
Exchange rate policy framework
Managed floating regime – Limiting excess exchange rate volatility » BoR uses dual-currency basket (the sum of 0.55 USD and 0.45 EUR) as an operational target of FX policy –
– –
No explicit or implicit exchange rate target No fixed borders Borders of the floating operational band are adjusted according to automatic rule (depending on the volume of interventions) 16
Exchange rate policy framework
Flexibility of mechanism has increased significantly since 2009 – Step-by-step widening of the corridor (from 2 to 6 roubles) – Increasing the elasticity of the borders At the moment rouble exchange rate is predominantly determined by the market forces 17
RUB exchange rate and BoR interventions
40
0
38
-10
36
-20
34
-30
32
-40
30
-50
28
-60
26
-70
24
-80
BoR FX interventions (rhs)
Bicurrency basket
Floating band
01.2012
10
07.2011
42
01.2011
20
07.2010
44
01.2010
30
07.2009
46
01.2009
40
07.2008
48
USD bn
The amount of BoR interventions has decreased since the introduction of the floating band mechanism
01.2008
RUB
ď ą
Fixed band
18
Interest rate policy framework
Interest rate corridor formed by the interest rates on the BoR standing facilities In between there are interest rates on main OMOs: REPO auctions and deposit auctions – Traditionally the system used to operate in a surplus of liquidity, so the policy framework used to be close to the floor system – Since September 2011 the system switched to the shortage of liquidity, so the REPO auctions have become the key policy instrument
19
Interest rate policy framework ď ľ
In 2010-2011 BoR continued to gradually narrow interest rate corridor in order to tighten control over the market rates – At the moment the width of the corridor is 225 b.p. (425 b.p. in 2009)
ď ľ
This along with better liquidity management resulted in reduced volatility of market interest rates, which contributed to improved transmission of monetary policy signals 20
Money market rates and BoR instruments ď ą
Volatility of the market interest rates has decreased significantly, and BoR’s ability to control them has improved
16% 14% 12%
Transition to liquidity shortage
10% 8% 6% 4% 2%
01.2012
07.2011
01.2011
07.2010
01.2010
07.2009
01.2009
07.2008
01.2008
0%
BoR refinancing rate
BoR stand-by REPO rate
BoR stand-by deposit rate
BoR minimum REPO auction rate
Interbank market O/N rate (MosPrime) BoR maximum deposit auction rate
Interbank market O/N rate (RUONIA)
21
Inflation and current monetary policy stance
At the moment monetary policy stance is neutral BoR did not respond to record low inflation at the beginning of 2012 as the decline in inflation was technical in nature (postponed increase in regulated prices and base effect) Going further where are inflationary risks associated with budget spending, tariff increases and unfavorable base effect 22%
Latest figures
20%
CPI 3.6% YoY (Apr) Core CPI 5.3% YoY (Apr)
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2007
2008 CPI YoY
2009 Core CPI YoY
2010
2011 Food prices YoY
2012
22
Transition to inflation targeting Inflation objectives are set each year in the “Guidelines for the Single State Monetary Policy” in terms of Dec/Dec inflation rate BoR has a poor historical record of reaching them Since 2009 BoR has become much better at achieving its goals Still there are many obstacles to moving to inflation targeting
16% 14% 12% 10% 8% 6% 4% 2% 2003
2004
2005
2006
2007 CPI YoY Goal
2008 Goal
2009
2010
2011
2012
2013
23
Inflation targeting: obstacles
Limited ability of the central bank to control inflation – Inflation is to a great extent explained by non-monetary factors such as stateregulated prices and supply-side factors – High rate of growth of tariffs and other regulated prices prevents sustainable decline in inflation – High share of food in CPI (37.3% of CPI basket in 2012) 24
Inflation targeting: obstacles
Inefficient transmission mechanism of monetary policy – Underdeveloped financial system – Low capitalization of both banking sector and financial markets High dependency on external conditions, hence, a lack of political will to allow free float of rouble Requires top-level political decision and (preferably) changes in the legal framework 25
Conclusions
In the pre-crisis period BoR’s policy was exchangerate oriented which led to the “impossible trinity” problem and absence of independent monetary policy Monetary policy has experienced dramatic changes during 2009-2011 Increased flexibility of FX rate and improved interest-rate policy enabled tighter control over market interest rates BoR continues to enhance its policies in order to complete transition to inflation targeting by 2014 26