Following inflation

The Central Bank lowered the refinancing rate

From today, Russian banks will formally be able to borrow money from the Central Bank at 11.5% per annum. Previously, the refinancing rate was 12% per annum. The current decline, like the previous ones, will not have a significant impact on the real value of money in Russia. And the regulator explains its actions only by reducing inflation.

Since the beginning of 2004, the Central Bank has changed the rate for the fifth time following a decrease in inflation. As Deputy Chairman of the Board of the Bank of Russia Konstantin Korishchenko said last Friday, “a change in the refinancing rate is not so much an instrument of subsequent influence, but rather a statement of an already established trend - a decrease in the rate of money supply and a slowdown in inflationary processes.”

As is known, in Russia the influence of the refinancing rate is local in nature; for example, fines and penalties charged to banks depend on this indicator. Credit organizations do not borrow money from the Central Bank at this rate. The Russian refinancing rate cannot determine the real value of money by directly influencing the exchange rate of the national currency, as is customary in other countries.

In general, in conditions of a very strong trade balance associated with a large volume of exports, exchange rate policy is now regulated by sterilizing the ruble mass through the stabilization fund. The Central Bank has no real influence either on the dynamics of the national currency or on the level of inflation, so the regulator can only adapt to the external environment.

The current decline only indicates the regulator’s expectations of a certain level of inflation by the end of the year. At a meeting with journalists in March, First Deputy Chairman of the Central Bank Alexey Ulyukaev stated that he considers it normal if the refinancing rate is 1-1.5 percentage points higher than the inflation rate. Based on the official inflation forecast for 2006, it should be 8.5%. At a recent meeting with journalists, the head of the Central Bank, Sergei Ignatiev, expressed hope that price increases will remain at this level. True, many market participants, as you know, are more pessimistic and predict inflation of 10-10.5%. Depending on the dynamics of price growth in Russia over the next six months, it will become clear whether the Central Bank will once again lower its refinancing rate.

Natalia ROMANOVA