Bank of Russia downgrades its structural liquidity surplus outlook for late 2018

The structural liquidity surplus was virtually unchanged in August, with the impact of liquidity factors close to neutral, according to the 30^th issue of ‘Banking Sector Liquidity and Financial Markets’, a BoR commentary. The structural surplus in late 2018 has been revised downwards by 2.0 trillion rubles to 1.7–2.1 trillion rubles following the Bank of Russia’s decision to suspend foreign currency purchases in the domestic market under the fiscal rule through the end of 2018.

Short-term interbank lending rates in August stayed close to the Bank of Russia key rate, albeit slightly tilted to the downside. Their absolute deviation from it declined compared to the previous averaging period. This points to an ongoing adjustment of the banking sector to the strong growth in the structural liquidity surplus that occurred in the second half of 2017 and the first six months of 2018.

Developments in the Russian financial market in August, similar to a month before, were chiefly shaped by external factors. Of these, the most impactful was an overall decline in demand for emerging market assets, combined with a tightening in anti-Russia rhetoric over sanctions.

Foreign investors’ OFZ sell-off and forex purchases pushed the ruble down, triggering a rise in the risk premium on Russian assets. This has acted to make market participants review in August their expectations as to the future Bank of Russia key rate path; some of them did not rule out a hike in it before the end of the year.