Russia’s central bank is expanding its efforts to mop up surplus liquidity with an instrument it hasn’t used for more than a year.
Instead of providing money to lenders at a regular repurchase auction, the central bank yesterday will offer to store 100bn roubles ($1.5bn) of funds for one week, paying as much as 10.5% in interest.
The deposit auction is the first since February last year, central bank data show.
“The central bank printed roubles and now wants to soak up the excess to prevent inflation from picking up,” said Fitch Ratings analyst Alexander Danilov. “Previously they’ve been providing liquidity by giving repo loans for the last several years.”
Policy makers are rolling out the new measure after already selling local-currency government bonds and increasing reserve requirements for commercial lenders as liquidity in the banking industry swings into surplus for the first time since 2011. As the second year of deficit spending floods the country’s financial system with cash, the inflows are weaning lenders off central bank funding.
Deposit auctions are among tools the monetary authority has to assert control over interest rates in the economy, according to Governor Elvira Nabiullina, who’s also said the central bank may respond with sales of its own short-term bonds.
Annual inflation is at risk of exceeding 7% in August and a threat remains that it will top the 4% target next year, the central bank’s research and forecasting department said on Monday. Price growth slipped in July to 7.2% from a year earlier, the slowest in more than two years.
The liquidity glut has pushed money-market rates below the central bank’s benchmark. The Ruonia overnight rate has averaged about 10.8% this year, down from more than 17% at the start of 2015. It reached 9.93% on July 4, the lowest since December 2014. The central bank has cut its benchmark once in the past year, lowering it to 10.5% in June. The rouble traded little changed at 64.5825 per dollar in Moscow yesterday.
Monday’s decision to switch to a deposit auction was due to the expected “inflow of liquidity in the banking sector via the budgetary channel at the start of August,” the regulator said in its statement. “Demand for liquidity has fallen, while supply has increased.”
Russia is continuing to deplete its sovereign wealth funds to cover the deepest budget deficit since 2010 after falling oil prices and foreign sanctions over the Ukraine crisis drove the economy of the world’s biggest energy exporter into a second year of recession.
The Bank of Russia needs to counter a wave of excess cash that could threaten its inflation target after the government transferred 2.6tn roubles ($40bn) from the Reserve Fund into the economy in 2015 and injected a further 780bn roubles this year.