Interbank rates approach Bank of Russia key rate in March

In March 2018, the negative spread between short-term interbank lending rates and the BoR key rate continued narrowing due to increased demand and decreased supply in this particular money market sector, reports the 25th issue of the Banking Sector Liquidity and Financial Markets commentary.

Bank of Russia operations to implement bankruptcy prevention measures with respect to certain banks, including with the participation of the Deposit Insurance Agency, resulted in the increased structural liquidity surplus. Accordingly, the structural liquidity surplus end-of-year forecast was revised upwards.

The Bank of Russia’s decision to raise the key rate by 25 bp in March was expected by the market. However, due to the worsening situation in the external markets, the expected interest rate path in the two-month horizon somewhat grew.

The tightening US monetary policy, increased probability of ‘trade war’ escalation and remaining volatility in the global stock markets have led to a noticeable decline in investors’ appetite for risk assets, including Russian.

Despite that, the volume of securities placements in the bonds market was still high leading to lower yields. Among other things, this was driven by the Bank of Russia’s decision to reduce the key rate and consistently low inflation.