How key rate decisions are made

The Bank of Russia Board of Directors sets the key rate eight times a year, namely at four quarterly core meetings and four interim meetings held in between. Following each meeting, the Bank of Russia publishes a press release on the key rate. In addition to the press release, the Bank of Russia Governor holds a press conference after each core meeting to comment on the decision made and answer journalists’ questions. On the sixth business day after a core meeting, the Bank of Russia also publishes its Monetary Policy Report.

Each meeting of the Board of Directors on the key rate is preceded by the meticulous preparation of relevant materials.

A key rate decision is based on the macroeconomic forecast, which includes the inflation forecast. Therefore, the process of the preparation and revision of the Bank of Russia’s forecast and of related analytical materials is called a joint forecasting round. The round joins analysts and experts from various departments and regional branches of the Bank of Russia, making the expert team of the Bank of Russia. The experts’ work within the forecasting round is coordinated by the Monetary Policy Department. The wide range of participants in the joint forecasting round enables a comprehensive view on the situation in the Russian economy and in the global economy, as well as on their prospects for development.

Period: three to four weeks prior to making a decision.

Principal participant: Monetary Policy Department.

Other participants: Bank of Russia senior executives, Research and Forecasting Department.

The key task of the joint forecasting round is to specify the parameters of the Bank of Russia’s baseline forecast and alternative scenarios, factoring in potential risks. To this end, the Monetary Policy Department carries out regular monitoring and detailed analysis of statistics and other data, as well as key events in Russia and abroad which may affect the situation in the Russian economy and the pace of inflation. The Department’s experts assess to which extent the existing processes are in line with the earlier forecasts and whether they may be reason to adjust the Bank of Russia’s forecast scenarios.

As a result of this analysis, the Monetary Policy Department elaborates assumptions for forecast scenarios, that is, a range of internal and external economic factors which do not depend directly on the Bank of Russia’s actions, but may materially affect Russia’s economy and inflation. These factors include, among others, the situation in global raw materials, commodity and financial markets, economic policy in major foreign economies, as well as possible changes in the fiscal, taxation, social and other areas of Russia’s economic policy. In addition, experts identify risks to the baseline scenario of the forecast, namely, events that may cause the situation to deviate from the baseline scenario. The analysis of risks is the basis for suggestions regarding alternative scenarios.

The Monetary Policy Department submits its suggestions on how to adjust assumptions for the baseline forecast and to more accurately specify risk factors to the Bank of Russia Governor and those Deputy Governors who are responsible for the main areas of the Bank of Russia’s activity. The Director of the Research and Forecasting Department also takes part in this discussion. At this meeting, the participants in the discussion may also request an analysis of additional scenarios that may be interesting to them with regard to possible key rate decisions and coverage in the Bank of Russia’s publications.

Following this preliminary meeting, the participants and the Governor agree upon a set of assumptions and risks to be further scrutinised by the Monetary Policy Department. These data become the basis for forecast calculations made by the Department.

Experts of the Monetary Policy Department prepare short-term (for up to two quarters) and medium-term (for three years) forecasts of economic indicators using a broad variety of analytical and model-based techniques.

The core of the medium-term forecasting system is formed by comprehensive forecasting models covering key interdependencies in the economy at the macro level. They are the basis for identifying the key parameters of the medium-term baseline macroeconomic forecast of the Bank of Russia, which are published following its core meetings. These parameters encompass changes in inflation, economic growth, monetary indicators, and the balance of payments. Furthermore, model-based techniques enable the calculation of the scenario path of key rate movements. In addition, models are used to identify the parameters of potential alternative forecast scenarios. The Bank of Russia especially focuses on the development of model-based approaches and economic research. For more details on the key areas of research, please refer to the Bank of Russia Annual Reports (from 2016). At the moment, the Bank of Russia has not yet published the information on its single system of model-based techniques, but it is planned to be published in the future. A range of economic research findings can be found in the special section Research on the Bank of Russia website, in the Russian Journal of Money and Finance, as well as in other editions (Voprosy Ekonomiki (Economic Issues), Prikladnaya Econometrika (Applied Econometrics), etc.).

Models are tools for forecast calculations. The final forecast is formed taking into account expert opinion, which relies on both model-based calculations and a wider range of factors that are not always possible to fully take into account using modelling tools.

Period: one to two weeks prior to making a decision.

Principal participant: Monetary Policy Department.

Assisted by: Research and Forecasting Department, Bank of Russia departments and regional branches, representatives of ministries and governmental agencies.

An essential element of the joint forecasting round is the communication between experts from various departments of the Bank of Russia, which enables a comprehensive assessment of the current economic situation and its prospects. In the course of working meetings of the Monetary Policy Department, experts clarify and coordinate their viewpoints regarding the assessment of key economic indicators, assumptions and parameters of forecast scenarios. Such integrated discussions and meetings are also important for analysing the mutual influence of monetary policy and other areas of the Bank of Russia’s policy.

In addition, there may be working meetings with representatives of the Ministry of Economic Development and the Ministry of Finance of the Russian Federation, where the participants discuss the key aspects of the economic situation, measures being implemented within macroeconomic policy, and their effect on the forecasts. To discuss individual issues, experts of the Bank of Russia may also hold meetings with representatives of other Russian ministries and governmental agencies. The Research and Forecasting Department also takes part in the meetings.

When needed, certain issues may be discussed at meetings with representatives of banks and business, including industrial unions and associations. These meetings are organised by the Monetary Policy Department and the Research and Forecasting Department. Senior executives of the Bank of Russia can also take part in these meetings. Experts of the Monetary Policy Department continuously communicate with colleagues from economic divisions of the Bank of Russia’s regional branches. The Monetary Policy Department requests regional experts to scrutinise certain issues. These requests are primarily related to additional analysis of cases and trends that cannot be unambiguously interpreted at the federal level. Experts from regional branches carry out a detailed analysis, taking into account the entire range of factors known from region-level information. In addition to the analysis of statistics, they may also communicate with local authorities and businesses. This format enables both the analysis of individual issues in greater detail and the identification of potential trends and risks that are not yet covered by statistics. Moreover, a video conference is organised during which the Director of the Monetary Policy Department discusses the findings of the regional analysis with representatives of regional branches of the Bank of Russia. In the course of the discussion, key conclusions are drawn which will be included in the materials to be submitted for consideration by the Bank of Russia Board of Directors.

The Bank of Russia monitors market participants’ expectations and may present its comments on the upcoming decision at any moment before the start of the quiet period (see Stage III). There can be different reasons for such comments, including incorrect interpretations of any given statements made by the Bank of Russia or an excessively large difference between the assessments of the economic situation or the upcoming decision by market participants and the Bank of Russia. The Bank of Russia assesses the necessity to give comments in each particular case. Therefore, market participants should not perceive such comments as a permanent practice or a mandatory action that must precede the Board of Directors’ meeting on the key rate.

At this stage, the Bank of Russia also takes into account recent statistics and other data influencing the parameters of the forecast scenarios.

Period: one week prior to making a decision.

Principal participants: Bank of Russia Governor, First Deputy Governors and Deputy Governors of the Bank of Russia responsible for the key areas of the Bank of Russia’s activity (hereinafter, Deputy Governors), Director of the Monetary Policy Department, directors of other Bank of Russia departments, heads of Bank of Russia regional branches.

The seven days prior to making a key rate decision (from 01:30 PM Moscow time on the seventh calendar day before the decision to 01:30 PM on the day of the decision) are called the quiet period. During this period, representatives of the Bank of Russia are prohibited to make any statements or publications that may impact financial market participants’ expectations regarding the upcoming decision of the Bank of Russia. Financial markets are traditionally sensitive to central banks’ communication on the eve of monetary policy decisions. Therefore, it is crucial to eliminate the risk of any ambiguous interpretation of such statements or publications and thus avoid increased uncertainty of market participants’ expectations and excessive market volatility. In addition, representatives of the Bank of Russia do not hold any meetings during the quiet period with banks, the expert community and investors on monetary policy issues. The quiet period is a common practice employed by central banks worldwide.

During the quiet period, the Bank of Russia Governor holds a series of meetings with the Deputy Governors supervising the key areas of the Bank of Russia’s activity, heads of Bank of Russia regional branches, and directors of a range of Bank of Russia departments.

At these meetings, the Director of the Monetary Policy Department presents the key findings of the analysis of the economic situation, inflation trends, and factors that are the basis for adjusting the forecasts, as well as the final results of the calculations under macroeconomic forecast scenarios. Based on the analysis and the forecast, he outlines possible options for the key rate decision at the upcoming meeting, as well as the path of the key rate over the entire forecast horizon. In the course of his statement, the Director of the Monetary Policy Department turns the floor over to heads of regional branches for them to provide more detailed comments on the situation in particular regions or individual issues in the regional analysis. In addition, the Director of the Monetary Policy Department presents the assessment on the economic situation and the calculations for the forecast.

After this, participants in the meeting pose their questions to the speakers to clarify the arguments. Moreover, the Bank of Russia Deputy Governors and department directors present at the meeting may give additional comments on issues within their competence, if needed.

Then, the participants discuss possible options for the upcoming decision and the signal regarding the Bank of Russia’s intentions related to its monetary policy. The monetary policy signal is an essential component of the decision package and is covered in the press release along with the key rate decision. Generally, the signal describes the Bank of Russia’s estimate of the possibility of further key rate changes if the baseline scenario of the forecast materialises, or an estimate of those factors that may affect the Bank of Russia’s key rate decision in the future. However, the signal is not the Bank of Russia’s obligation. And, therefore, the materialisation of this signal depends on whether and to which extent the situation develops in line with the baseline forecast. This signal is necessary to give economic agents a better understanding of the further actions of the Bank of Russia, which is critical to how they form their expectations. In turn, the Bank of Russia continuously monitors market participants’ expectations.

Thus, within the discussion of a key rate decision, the participants in the meeting provide their justified opinions on two issues: (1) which option for the key rate decision they support; and (2) which signal should complement the decision.

With account for the results of the earlier discussion, preliminary meetings are held to discuss the draft press release on the key rate decision, and, in the core rounds, to discuss the draft Monetary Policy Report.

Thus, the series of preliminary meetings with the Bank of Russia Governor enables proper and comprehensive discussions of all aspects to be factored in when making a decision and to be reflected in all key public documents. In the course of these discussions, the participants elaborate a rationale for the upcoming decision for its final consideration by the Bank of Russia Board of Directors. Furthermore, there may arise additional issues during preliminary meetings that are scrutinised by the Monetary Policy Department within the preparations for the meeting of the Board of Directors making the final decision on the key rate.

Period: day of the decision.

Principal participants: Bank of Russia Board of Directors.

Other participants: Director of the Monetary Policy Department, Director of the Public Relations Department, representatives of the Ministry of Economic Development and the Ministry of Finance of the Russian Federation.

At its meeting, the Bank of Russia Board of Directors listens to the report by the Director of the Monetary Policy Department on the analysis of the current situation, the key parameters of the forecast scenarios, and the scope of possible decisions on the key rate and its future path. The report provides the most up-to-date information available as of the morning of the meeting day. Then, the participants discuss the principal issues.

The meeting is attended by representatives of the Ministry of Finance and the Ministry of Economic Development of the Russian Federation, who may comment on the topics under consideration, including on economic policy issues within the competence of their agencies.

Members of the Board of Directors voice their opinions regarding the assessment of the current situation, the forecast scenarios, and the key rate decision. In the course of the meeting, the Board of Directors seeks to achieve a consensus on the most critical aspects of the discussion and on the key rate decision. Among other things, this is crucial, since the Bank of Russia sticks to a ‘single voice’ policy providing the public with a single and consistent opinion from the Bank of Russia. This is important for economic agents to correctly comprehend the Bank of Russia’s actions, which influences their expectations regarding monetary policy and inflation trends.

The Board of Directors adopts the key rate decision, and then discusses the draft press release and approves its final text. The invited participants in the meeting, including representatives of the Ministry of Economic Development and the Ministry of Finance of the Russian Federation, do not take part in the voting.

The press release describes the factors that were the basis for the decision and provides an opinion on the prospects of Russia’s economy and an information signal regarding potential changes in monetary policy in the future. The press release is clearly structured: it comprises a preamble with the decision and a brief rationale for it, as well as the permanent sections ‘Inflation dynamics’, ‘Monetary conditions’, ‘Economic activity’ and Inflation risks’. Such a structure simplifies navigation within the document and helps in finding the most important information quickly. As noted above, the press release also contains the signal regarding the Bank of Russia’s monetary policy in the future. Generally, it is provided at the end of the preamble. However, the signal shall not be deemed to be the Bank of Russia’s obligation. It materialises if the situation develops in line with the baseline forecast. Such a signal is a widespread practice applied by inflation-targeting central banks.

The press release on the key rate is published at 01:30 PM Moscow time. As mentioned above, this event ends the quiet period.

After that, on the day of the core meeting, the Bank of Russia Governor makes a public statement on the decision made (at 03:00 PM Moscow time). It is broadcast in real time on the Bank of Russia website in the Russian and English languages and is available to the general public. In the course of the press conference, the Bank of Russia Governor may focus in greater detail on particular factors behind the decision made and the Bank of Russia’s forecast, as well as answers reporters’ questions.

Period: two weeks after the decision.

Principal participants: senior executives of the Bank of Russia, Monetary Policy Department, Research and Forecasting Department, Public Relations Department, Bank of Russia regional branches.

The Bank of Russia provides its explanations for the key rate decision and the key aspects of the pursued monetary policy not only on the day of the decision, but also throughout the entire period until the next key rate decision. The Bank of Russia continues its communication with the public, journalists, and representatives of the authorities, businesses, and the expert community. The most intensive stage takes place during the two weeks following the key rate decision.

On the sixth business day after the decision, the Bank of Russia publishes its Monetary Policy Repor within core rounds. The Report analyses the key aspects of the development of the current situation, as well as provides a detailed description of the forecast scenarios and tables with the key forecast parameters. In addition, the Report contains the results of the discussion of the key issues in the course of the preliminary meetings and the meeting of the Bank of Russia Board of Directors. The format of the Report enables their detailed coverage.

After the core meetings, senior executives of the Bank of Russia, as well as representatives of the Monetary Policy Department and the Research and Forecasting Department hold meetings with representatives of foreign financial institutions (banks, funds), analysts, and the expert community, including representatives of universities. The main goal of these meetings is to answer questions regarding monetary policy and to receive feedback from the audience.

In addition, executives of the Bank of Russia’s regional branches together with the Monetary Policy Department carry out meetings with enterprises of the real sector, banks, local authorities and universities. Such meetings are usually accompanied by the publication in mass media of the interviews with the Bank of Russia’s representatives, who answer questions related to the implementation of monetary policy. These interviews are given to both business editions and mass media targeting the general public. The switch to more extensive explanations of monetary policy issues at the regional level enables a more targeted approach to interaction with various audiences and the impact on inflation expectations.