Asset `Bubbles' a Risk as Bank of Russia Eyes Shift in Liquidity

  • Yudaeva joins central bank chief in warning over market impact
  • Central bank has tools to react if needed, policy makers say

Sounding warnings about the market fallout of deficit spending, a top Russian central banker said a financial system awash in liquidity is threatening to create asset “bubbles.”

As the Finance Ministry boosts liquidity by running a deficit for a second year, the inflows are allowing Russian lenders, net borrowers from the central bank since 2011, to wean themselves off its funding. First Deputy Governor Ksenia Yudaeva said that while the surplus of cash won’t weaken its ability to control the cost of money, the Bank of Russia is watching for risks to build.

“In the conditions of a liquidity surplus, we can’t completely rule out the risk of bubbles forming on certain markets,” Yudaeva said Friday at a forum in Moscow. “The Bank of Russia will carefully monitor the situation and take macro-prudential measures if necessary.”

The world’s largest energy exporter, which relies on oil and gas for about 40 percent of its budget revenue, is using one of its two sovereign-wealth coffers to finance spending and plans to transfer 2 trillion rubles ($29.7 billion) from it into economy this year after channeling 2.6 trillion rubles in 2015. The collapse in crude price pushed Russia into its widest deficit since 2010 last year.

‘Excessive Interest’

With money flooding into the financial system, banks may show an “excessive interest” in risky lending and assets, Bank of Russia Governor Elvira Nabiullina said on Thursday. The banking industry may swing into liquidity surplus already this year, according to Nabiullina.

Yudaeva drew a parallel with 2011, when a liquidity buildup in Russia fed a boom in unsecured consumer lending.

Flush with cash, banks are already lending to each other at a lower rate than they borrow from the central bank. The overnight money-market rate known as Ruonia has averaged 10.93 percent this year, down from more than 17 percent at the start of 2015. That compares with the central bank’ benchmark at 11 percent.

A recovering energy market is also boosting Russian assets. Stocks advanced on Friday and the ruble headed toward a second weekly gain as Brent crude traded back above $40 a barrel. Russian government bond markets also strengthened, with the yield on five-year debt dropping five basis points to 9.36 percent.

Mopping Up

To make sure that money-market rates correspond to the central bank’s benchmark, it may soak up liquidity by offering to place cash on deposit with the regulator, according to Yudaeva.

Policy makers kept borrowing costs on hold in March for a fifth meeting, warning in their last rate statement that “some uncertainties surrounding budget configuration” are among reasons for lingering inflation risks. At the same time, the Bank of Russia has pointed to the looser lending conditions as one less reason for them to restart monetary easing.

The swing in liquidity isn’t about to deprive the central bank of control over the cost of money or weaken the transmission of its rates, according to Yudaeva. Its policy will be crafted in such a way as to ensure that changes in the benchmark will reach the economy through the financial system, she said.

“If budget reserve funds will be spent rather quickly, then we’ll start to borrow from banks,” Nabiullina said. “In any case, however our relations with banks change, the central bank has all the instruments to regulate interest rates in the economy.”

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