Russian central bank: Nabiullina makes a splash in first policy meeting

By:
Dominic O’Neill
Published on:

Incoming governor holds bank’s first press conference; launches new refinancing facility.

Elvira Nabiullina’s post policy-meeting press conference in July was a first both for her and for the Russian central bank, which she joined as governor on June 24. And although the central bank kept its main policy rates on hold, Nabiullina was by no means short of things to talk about.

At the meeting a new refinancing facility was launched, expanding eligible collateral to non-marketable assets and pushing the term out to 12 months. The bank scheduled the first auction, for a maximum of R500 billion ($16 billion) at a floating interest rate with a minimum 5.75%, for July 29.

"Nabiullina’s first policy meeting created something of a bang," says Vladimir Kolychev, head of research at Rosbank, Société Générale’s Russian unit. "The first auction for the new facility is big. It shows the central bank and Nabiullina mean business."

Shift in focus

Kolychev says the new facility should help alleviate the wide divergence between money-market rates and policy rates in Russia, as Nabiullina continues the central bank’s shift in focus from maintaining exchange-rate stability towards inflation targeting.

According to the central bank’s statement: "The development of the system of the Bank of Russia’s monetary policy instruments, implemented by [medium-term refinancing operations], will contribute to strengthening the interest rate channel of the monetary policy transmission mechanism."

The announcements come after worries that Nabiullina had been chosen as governor, at the expiration of previous governor Sergei Ignatiev’s term, because president Vladimir Putin might have intended to rely on her to boost growth. She was previously Putin’s economy minister and adviser.

Elvira Nabiullina, Russia’s new central bank governor, joined the bank on June 24
Elvira Nabiullina, Russia’s new central bank governor, joined the bank on June 24
"The market had a lot of worries about Nabiullina’s ability to protect the bank’s independence," says Natalia Orlova, chief economist at Alfa Bank. On this occasion, the tone of the bank’s announcement was therefore perhaps as important as its content, says Orlova.

Increased reliance on central bank funding has already helped trigger a consumer loans boom in Russia. The new instrument might now mitigate fears of a shortage of collateral eligible for the central bank’s short-term repo, according to Rosbank’s Kolychev.

Overall loan growth in Russia remains almost 20% year on year. Although slowing from last year, consumer lending is still expanding at around 30% year on year, compared with around 10% annual growth in corporate loans, according to Orlova.

"I would say [central bank] policy should be continuity, but taking into account new challenges," Nabiullina said in an interview with Bloomberg shortly before taking over the bank. "Slowing economic growth is a reality that the central bank will need to consider."

Research from RBS says it is "too early to interpret [the new refinancing facility] as a Russian equivalent of quantitative easing". It remained to be seen whether or not banks, which would be interested in bidding in the auction, would have enough non-marketable collateral, said the research.

Research from Moscow-based lender VTB, however, called the launch of the new medium-term facility "a bold easing step". According to VTB: "The ability to borrow at the new facility will put downward pressure on banks’ deposit and lending rates."

VTB says that although the effect could take time to realize, it provides "a well-needed stimulus for the economy". Kolychev agrees, saying it might provide more effective stimulus than simply cutting the main policy rate by 25 basis points. "This is an important step to improve conditions for final borrowers," he says.

Good start

Nabiullina also needs to appear strong as the central bank takes on wider regulatory powers, and faces challenges such as new Basle III rules, starting January 1 2014 (some banks in Russia might be allowed more time to comply, according to a senior investment banker in Moscow).

The central bank had, in fact, prepared for a new medium-term refinancing facility under Ignatiev. The date of the first auction is simply earlier than expected: previously the bank said the new facility would be introduced by the end of the third quarter.

Likewise, the introduction, immediately after Nabiullina’s arrival, of press conferences after every one-in-four monthly policy meetings appears to herald change. But such press conferences are common in other countries, and were to be expected soon anyway, given the move to inflation targeting.

Setting the tone might therefore have been a factor in a decision to introduce both the press conferences and the new refinancing instrument facility now, in Nabiullina’s first policy meeting, says Kolychev: "It creates the impression that the new governor is introducing positive changes."