The System of Monetary Policy Instruments

The Bank of Russia employs the system of monetary policy instruments to steer overnight interest rates at which banks carry out operations with each other in the money market. The Bank of Russia seeks to maintain money market rates within the borders of the interest rate corridor and to keep them close to the key rate which indicates monetary policy stance.

Type of instrument Purpose Instrument Term Frequency Decision-maker
on the operation
and its volume
Short-term operations: operations directly aimed at steering money market rates
Main auction-based operations Steering money market rates REPO auctions / deposit auctions 1 week weekly Bank of Russia
Overnight standing facilities Restricting the fluctuation range of money market rates with the borders of the interest rate corridor Overnight loans; FX swaps; Lombard loans; REPOs; loans secured by non-marketable assets or guarantees; deposit operations 1 day daily credit institutions
Fine-tuning operations Preventing excessive fluctuations of money market rates within the interest rate corridor REPO and FX swap auctions / deposit auctions from 1 to 6 days1 occasionally Bank of Russia
Additional long-term operations
Regular auction-based operations Compensating medium-term liquidity requirement and improving conditions for conducting main operations Auctions to provide loans secured by non-marketable assets 3 months monthly Bank of Russia
Occasional auction-based operations Improving conditions for conducting main operations, restricting the impact of structural liquidity deficit on maturity of credit institution liabilities Auctions to provide loans secured by non-marketable assets from 1 to 3 weeks occasionally Bank of Russia
18 months occasionally Bank of Russia
Lombard credit auctions 36 months occasionally Bank of Russia
Standing facilities Loans secured by non-marketable assets or guarantees from 2 to 549 days daily credit institutions

1 Fine-tuning 1- to 2-day FX swap auctions are carried out simultaneously with fine-tuning REPO auctions for similar term.

The Bank of Russia main instrument for steering money market interest rates is auction-based one-week operations. The Bank of Russia conducts these operations once a week as auctions to provide liquidity (REPO auctions) or auctions to absorb liquidity (deposit auctions). The Bank of Russia determines the direction of the main operations and the maximum volume of liquidity provision (absorption) based on the analysis and forecast of banking sector liquidity. As structural liquidity deficit is currently observed, the Bank of Russia provides liquidity to the banking sector using REPO auctions as the main instrument.

Minimum (maximum) interest rate at which banks can submit their bids to one-week auctions to provide (absorb) liquidity is the Bank of Russia key rate. At the same time, the interest rates at which banks receive (place) funds are determined at the auction.

Overnight standing facilities are used to restrict fluctuations in money market rates. Deposit operations are the standing facility instrument to absorb liquidity while a set of instruments varying by operation form (secured loans, REPO, swaps) and types of collateral (bonds, shares, foreign currency, credit claims on non-financial organisations, guarantees, gold) is used to provide liquidity.

While it’s the Bank of Russia who determines the dates when main auction-based operations are conducted and decides on the total volume of liquidity provision (absorption), operations under standing facilities are initiated by banks and can be used by them on the daily basis. The volume of liquidity provided (absorbed) through these operations is restricted only by the limits connected with Bank of Russia risk management.

As the Bank of Russia satisfies the banking sector’s needs for liquidity provision (absorption) mainly through the auction-based operations, the volume of overnight standing facilities is relatively small. As a rule, banks resort to these instruments in case of short-term imbalances which cannot be removed through operations in the interbank market.

Interest rates on overnight standing facilities to provide and absorb liquidity are fixed and shape the upper and the lower border of the Bank of Russia interest rate corridor, respectively. Its borders are symmetrical with respect to the key rate and are shifted automatically in line with its changes. The interest rate corridor width determines the permitted fluctuation range of money market rates and currently amounts to 2 percentage points.

 

 

On certain days, when banking sector liquidity demand deviates significantly from its supply, the Bank of Russia can conduct 1- to 6-day auction-based fine-tuning operations with the view of preventing excessive fluctuations of money market rates within the interest rate corridor. The form of these operations varies from 1- to 6-day REPO auctions, 1- to 2-day REPO and USD/RUB and EUR/RUB buy/sell FX swap auctions to 1- to 6-day deposit auctions. Every morning, the Bank of Russia updates banking sector liquidity estimates and when necessary takes a decision and makes an announcement on holding a fine-tuning auction as well as on its term and maximum volume of liquidity provision (absorption). Fine-tuning FX swap auction can be held only as a supplement to a fine-tuning REPO auction. The Bank of Russia makes decision whether to supplement a 1- to 2-day fine-tuning REPO auction with a fine-tuning USD/RUB and EUR/RUB buy/sell FX swap auction for similar term depending on the situation in the money market including the utilisation of marketable collateral. The minimum (maximum) interest rate on fine-tuning operations to provide (absorb) liquidity equals to the Bank of Russia key rate.

Besides short-term operations, the Bank of Russia system of monetary policy instruments also includes long-term refinancing operations which enable banks to borrow against securities, non-marketable assets (claims under loan agreements with non-financial organisations), guarantees and gold. The use of these instruments is aimed at improving conditions for main Bank of Russia refinancing operations – REPOs. The use of wide range of types of collateral for long-term refinancing operations is conditioned by the scarcity of securities included in the Bank of Russia Lombard list servicing as collateral for REPOs as well as by stability and scope of structural liquidity deficit. The use of long-term refinancing operations increases the impact of the Bank of Russia main operations on money market interest rates as well as dampens the effect of structural liquidity deficit on maturity of credit institution liabilities.

Currently, the principal long-term refinancing instrument is monthly auctions to provide loans secured by non-marketable assets for a three-month term. Besides, the Bank of Russia can carry out similar operations for a term from 1 to 3 weeks, an 18-month term, and Lombard credit auctions for a 36-month term, if necessary. Standing facilities to provide loans for a term from 2 to 549 days secured by non-marketable assets, guarantees and gold are used as an additional instrument. Meanwhile, all long-term operations are held at a floating interest rate linked to the Bank of Russia key rate: starting from the date the key rate is changed the interest rate on previously provided loans is adjusted by the respective magnitude.

The Bank of Russia can also carry out other operations, particularly issue Bank of Russia bonds (BRB), purchase or sell securities in the open market. However, these operations are not currently conducted.

For detailed information on Bank of Russia instruments and banking sector liquidity management refer to the following materials on the Bank of Russia website:

   
Rates, Description, Requirements for Participants, Collateral, Laws & Regulations Monetary Policy
Statistics for monetary policy instruments and banking sector liquidity indicators Statistics/Monetary Policy Instruments of the Bank of Russia and Banking sector liquidity indicators
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