Institutional framework

In accordance with the Constitution of the Russian Federation and Federal Law 'On the Central Bank of the Russian Federation (Bank of Russia)' one of the key functions of the Bank of Russia (BoR) is to protect the ruble and ensure its strength by maintaining price stability, including for creating conditions for balanced and sustainable economic growth. Price stability is the main monetary policy goal, which implies steadily low inflation. In order to maintain price stability, BoR implements monetary policy within the inflation targeting regime. The current goal of the BoR's monetary policy is to maintain annual inflation close to 4% on a continuous basis. The inflation target is set for the annual growth rate of consumer prices, that is, the change in prices for goods and services purchased by households over the last 12 months.

Under the inflation targeting regime, the key rate is the main instrument of the BoR's monetary policy. The key rate is the interest rate on main operations carried out by the BoR to regulate the banking sector liquidity. The BoR's Board of Directors makes its key rate decisions on a regular basis eight times a year. After each Board of Directors' key rate meeting a press release on the specifics of and rationale for decision is released and Governor of the BoR holds live press conference. Furthermore, the BoR publishes its medium-term macroeconomic forecast four times a year updated at each of the core key rate meetings, along with press release on the key rate. Since 2021, the forecast was supplemented by projected path of the key rate. Monetary Policy Report is also released after each core meeting.

Key features of the implementation framework

To achieve the primary objective of monetary policy – that is price stability – the BoR sets the operational target of monetary policy - bringing money market overnight rates close to the key rate.

The BoR achieves the operational target by implementing the adopted general approaches to managing the banking sector liquidity and money market rates with the system of monetary policy instruments. The latter consists of reserve requirements, standing facilities and market operations.

Another crucial element of the BoR operational framework is its counterparty policy. To reduce financial and reputational risks the Bank provides liquidity under its monetary policy implementation framework only against qualified collateral (securities included in the Lombard list).

Reserve requirements

Currently depository institutions and infrastructure organizations holding accounts at the BoR are to comply with reserve requirements (RR). This measure serves as a tool to create a stable and sustained demand for central bank account balances and influence the structure of commercial banks' balance sheets.

RR ratios are currently set at 4,75% on ruble-denominated liabilities (1% for banks with a base license which comprise a small share of the banking sector), 8% on FX-denominated liabilities. Differentiated RR ratios are aimed at discouraging the dollarization of banks' balances.

Most banks are eligible for reserve requirement averaging allowing banks to maintain a certain level of deposits at the central bank over the maintenance period (usually within 28-35 days). The averaging mechanism mitigates money market rates volatility by absorbing liquidity shocks due to daily payments.

Standing facilities

Most financial institutions holding account balances at the BoR are eligible for standing facilities. Currently the eligible counterparties include banks and non-bank entities with a credit institution license. The primary objective of standing facilities is to reduce volatility of money market rates by absorbing and providing liquidity at penalty rates. The rates on standing facilities form interest rate corridor. The BoR employs a symmetric rate corridor of 200 bps.

Standing facilities encompass overnight loans (which are an extension of intra-day loans) and a wide range of operations with 1-day maturity: Lombard loans, currency swaps, repos, loans secured by non-marketable assets to provide liquidity, deposit operations to absorb liquidity.

The BoR also provides standing intraday credit facility to assist banks in daily transactions.

Eligible counterparties have access to intraday and overnight operations at all times during the working hours of the Bank of Russia Payment System.

The BoR also provides long term loans secured by non-marketable assets at a higher rate (key rate + 175 bps) which are aimed at improving conditions for conducting main operations, restricting the impact of structural liquidity deficit on maturity of credit institutions' liabilities with a redemption period of 2 to 549 days. As Russian banking sector is currently in liquidity surplus, these operations are not widely used.

Open market operations

Open market operations (OMOs) form a primary set of tools to steer money market rates towards the policy rate.

The main OMOs are 1-week deposit (or repo) auctions held weekly. The direction of an auction (repos to provide liquidity, deposits to absorb funds) depends on the situation with banking liquidity. The maximum allotment amount is determined based on liquidity forecast. The minimum/maximum rate at a repo/deposit auction is equal to the key rate.

OMOs also include "fine-tuning" operations conducted at the discretion of the BoR to prevent excessive interest rate fluctuations. "Fine-tuning" operations can take the form of repo, FX swaps and deposit auctions with a redemption period of 1 to 6 days and the maximum/minimum rate equal to the key rate.

Finally, the BoR employs a number of long-term OMOs that address medium and long-term liquidity needs of the banking sector. Currently under liquidity surplus the BoR issues 3-month coupon bonds which are offered to the credit institutions weekly. The primary objective of bond issuance is to absorb medium-term liquidity surplus.

To provide medium-term liquidity the BoR has in it toolkit 3-month auction loans secured by non-marketable assets. These loans were provided under liquidity deficit however currently these operations are not conducted.

In May 2020, the BoR introduced 1 month and 1 year repo auctions held monthly with funds provided at a small spread to the key policy rate. These operations initially were targeted at reducing the maturity mismatch in banks' balance sheets amid shrinking structural liquidity surplus and decreasing maturities of credit institutions' liabilities.