EBRD welcomes Bank of Russia’s switch to floating rate

The European Bank for Reconstruction and Development (EBRD) welcomes the move by the Central Bank of Russia (CBR) to move to a floating rate on long term financing provided to banks.

The CBR plans the move for Q1 next year. Until now, local banks could only access fixed rate funding with longer maturities.

The EBRD called this approach “expensive and inflexible” and welcomes the change.

CBR plans to launch one to 12 month floating rate refinancing instruments linked to the Rouble OverNight Index Average (RUONIA) rate.

RUONIA has been calculated by the CBR since Sept 8, 2010. Its advantage is that since it is set by market participants based on a large volume of actual overnight transactions, it is far less prone to market manipulation than indices reflecting indicative levels.

The EBRD has been actively participating in the creation of a transparent interest rate setting environment in Russia for many years.

The bank said CBR’s choice of the RUONIA index for this move was “a very positive step in the promotion of an efficient money market mechanism.”

The bank added that the move would increase the need for RUONIA-linked derivatives, as banks borrowing from the CBR under the floating rate would seek to hedge their exposure to fixed rate assets through swaps.

This would lead to a deepening of the existing derivatives market, making the RUONIA index the main barometer of interest rate expectations in the rouble market.

The shift should also increase demand for longer-term refinancing through the CBR and improve liquidity in the banking system.

Finally, EBRD expects the move to help target inflation. It expects CBR to eventually narrow the interest rate band in order to reduce volatility in rouble short-term interest rates.

This is “consistent with the CBR’s stated intention of widening the rouble corridor on the foreign exchange market so as to allow the currency to free float completely by 2015.

“Such a move will contribute to the stabilisation of volatility in the RUONIA rate, creating the conditions for improved forecasting and planning of longer-term investments in the wider Russian economy.”

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