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