Photographer: Andrey Rudakov/Bloomberg

Bank of Russia Rummages Through Toolkit as Liquidity Glut Surges

  • Central bank switches from repurchase auction to soak up cash
  • Second year of deficit spending is flooding banks with rubles

Russia’s central bank is expanding its efforts to mop up surplus liquidity with an instrument it hasn’t used for more than a year.

Instead of providing money to lenders at a regular repurchase auction, the central bank on Tuesday accepted 100 billion rubles ($1.5 billion) of funds on deposit for one week, paying a weighted average of 10.22 percent in interest. Demand from 62 banks at the first such auction since February last year came to 187 billion rubles.

“Going forward, the central bank will have to predict available liquidity levels and alternate the provision and absorption instruments, like British taps” that separate hot and cold water, Vladimir Miklashevsky, senior strategist at Danske Bank A/S in Helsinki, said by e-mail.

Elvira Nabiullina
Elvira Nabiullina
Photographer: Andrey Rudakov/Bloomberg

As the second year of deficit spending floods the country’s financial system with cash, the inflows are weaning lenders off central bank funding. Policy makers are rolling out the new measure after already selling local-currency government bonds and increasing reserve requirements for commercial lenders as liquidity in the banking industry swings into surplus for the first time since 2011. 

Deposit auctions are among tools the monetary authority has to assert control over interest rates in the economy, according to Governor Elvira Nabiullina, who’s also said the central bank may respond with sales of its own short-term bonds.

Inflation Risks

Annual inflation is at risk of exceeding 7 percent in August and a threat remains that it will top the 4 percent target next year, the central bank’s research and forecasting department said on Monday. Price growth slipped in July to 7.2 percent from a year earlier, the slowest in more than two years.

The liquidity glut has pushed money-market rates below the central bank’s benchmark. The Ruonia overnight rate has averaged about 10.8 percent this year, down from more than 17 percent at the start of 2015. It reached 9.93 percent on July 4, the lowest since December 2014. The central bank has cut its benchmark once in the past year, lowering it to 10.5 percent in June. The ruble traded little changed at 64.65 versus the dollar as of 2:25 p.m. in Moscow.

Monday’s decision to switch to a deposit auction was due to the expected “inflow of liquidity in the banking sector via the budgetary channel at the start of August,” the regulator said in its statement. “Demand for liquidity has fallen, while supply has increased.”

Buffers Wither

Russia is continuing to deplete its sovereign wealth funds to cover the deepest budget deficit since 2010 after falling oil prices and foreign sanctions over the Ukraine crisis drove the economy of the world’s biggest energy exporter into a second year of recession. The Bank of Russia needs to counter a wave of excess cash that could threaten its inflation target after the government transferred 2.6 trillion rubles from the Reserve Fund into the economy in 2015 and injected a further 780 billion rubles this year.

In June, Nabiullina said the central bank plans to sell “tens of billions of rubles” of short-term bonds in a pilot program to absorb excess funds over the coming two to three months.

“The results came in line with expectations: offered rates varied from 9.75 percent to 10.5 percent, comparable to what we’ve been observing in the money market recently,” Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow, said by e-mail. “Volumes are in line with what banks have been placing on overnight deposits.”

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