The instruments of interest rate policy were also modified significantly. In order to enable interest rate policy to be effective, credit ...
The instruments of interest rate policy were also modified significantly. In order to enable interest rate policy to be effective, credit organisations should be using the policy instruments frequently, and the rates on these instruments should influence market exchange rates. This was not exactly the case during the pre-crisis period, when commercial banks used the Bank of Russia’s liquidity facilities mainly during brief periods with liquidity deficits. In order to increase the significance and volume of the liquidity management operations, the rates on the Bank of Russia’s instruments were brought closer to market rates, and the gap between the rates on the liquidity-absorbing and liquidity-providing operations was narrowed. By 2011, the structural liquidity surplus was gone, the commercial banks started using the Bank of Russia’s liquidity facilities on a regular basis,
and the rates and 302 BIS Papers No 78 volumes of the liquidity-providing/absorbing operations were having a direct effect on market conditions, making interest rate policy much more effective. September 2013 saw the most recent changes to the Bank’s system of monetary policy instruments. First, the Bank of Russia introduced its key rate –
the interest rate on the Bank’s one-week liquidity provision and absorption open market operations, including a maximum interest rate on one-week deposit auctions and a minimum interest rate on one-week repo auctions. Second, an interest rate band was established by setting rates on the standing liquidity-absorbing/providing facilities at 1% lower/higher than the key rate. To sum up, the Bank of Russia has modified its mix of policy instruments considerably in response to changes in macroeconomic and financial conditions during and after the world financial crisis. A transition was made from a policy that was primarily exchange-rate-stability-oriented, by which the money supply and interest rates were at least partially beyond the control of the Bank, to a policy by which the monetary aggregate dynamics are no longer tied to FX interventions by the central bank. The Bank of Russia now has much greater control of the money supply and interest rates via its interest rate policy instruments, while still maintaining the ability to smooth undesirable exchange rate fluctuations thanks to a more flexible FX intervention mechanism.
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