Monetary Policy Framework
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.
The reserve requirements create credit institutions’ demand to hold a certain volume of funds on their correspondent accounts with the Bank of Russia (certain volume of liquidity). Then the Bank of Russia by either providing insufficient liquidity or absorbing surplus liquidity makes sure that the actual funds on the correspondent accounts are equal to the predetermined demand for liquidity and keeps money market rates close to the key rate.
|Type of operations||Purpose||Instrument||Term||Frequency|
|Main auction-based operations||Steering money market rates||REPO auctions / deposit auctions||1 week||weekly|
|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; deposit operations||1 day||daily|
|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|
|Long-term auctions||Improving conditions for conducting main operations:||Auctions to provide loans secured by non-marketable assets||3 months||monthly|
|absorbing medium-term liquidity surplus||Issuance of Bank of Russia bonds||3,6, 12 months||occasionally|
|compensating medium-term liquidity needs||Auctions to provide loans secured by non-marketable assets||3 months|
|Standing facilities||Improving conditions for conducting main operations, restricting the impact of structural liquidity deficit on maturity of credit institutions’ liabilities||Lombard loans||from 2 to 90 days||daily|
|Loans secured by non-marketable assets||from 2 to 549 days||daily|
The main instrument used by the Bank of Russia to align the volume of banking sector liquidity with its demand and to steer 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 forecast of banking sector liquidity. As structural liquidity surplus is currently observed, the Bank of Russia absorbs liquidity from the banking sector using deposit 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, foreign currency, credit claims on non-financial organisations) 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 and their bids are met fully. 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 handled 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
Besides short-term operations, the Bank of Russia system of monetary policy instruments also includes long-term liquidity providing or absorbing operations.
Under liquidity surplus the Bank or Russia only absorbs banking sector liquidity over an extended time frame through the issuance of Bank of Russia bonds (OBR). The bonds are issued for 3, 6, 12 — months terms, the coupon period is set at 3 months. The coupon yield for each day of the coupon period is equal to the key rate effective on that day. OBR issuance allows the Bank of Russia to absorb medium-term liquidity surplus and enhance the impact of the Bank of Russia main operations on money market interest rates. Moreover, if a bank faces liquidity shortage before the OBRs it hold expire, it can sell them on the secondary market or use them as collateral in the money market or to draw funds from the Bank of Russia.
In case of liquidity deficit, the Bank of Russia can conduct auctions for the provision of