Russia ups reserve requirements in inflation fight

MOSCOW - Russia's central bank, on the war path against inflation, said on Friday it will raise mandatory bank reserve requirements from Sept. 1 2008 in a bid to soak up the liquidity pool from foreign borrowings.

By (Reuters)

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Published: Fri 1 Aug 2008, 6:30 PM

Last updated: Sun 5 Apr 2015, 11:47 AM

Requirements on banks' liabilities towards foreign lenders will rise to 8.5 percent from 7.0 percent from Sept. 1. On rouble retail deposits they will increase to 5.5 percent from 5.0 percent and on other liabilities to 6.0 percent from 5.5.

This is the second increase in just over two months, as the central bank battles to rein in inflation running at around 15 percent on an annualised basis so far this year.

"It's not a surprise. The central bank is...making another step towards tightening monetary policy. From the three options -- appreciating the rouble, hiking interest rates and raising the reserve requirements -- it's choosing probably the least painful one," said Stanislav Ponomarenko, head of research for Russia at ING.

"It's noticeable that again the biggest increase is for reserves related to external borrowing...This capital inflow is one of the key sources of liquidity in the system and thus it (the central bank) is trying to limit it, to destimulate banks from borrowing externally."

The central bank also said it would raise reserves averaging ratio -- which allows banks to spread their reserves over time and even out periods of excess and scarce liquidity -- to 0.55 from 0.50.

Mandatory reserve requirements are the money the banks should set aside, and thus raising them limits the cash available in the system and potentially curbs price rises.

The Economy Ministry said this week it expected inflation for 2008 as a whole at 11.8 percent, hoping that a good harvest this summer would push prices lower, but analysts polled by Reuters forecast a rate of 13.2 percent.

ING's Ponomarenko said the central bank would probably now wait for the August and September inflation figures, but if these did not show tamed prices then further monetary tightening was likely to follow.

Braced for inflows

The news comes as Russian firms continue to seek funding, with some eyeing acquisition opportunities at home or abroad.

Russia's largest bank Sberbank SBER03.MM is in talks about securing a $1 billion, five-year syndicated loan, while Vnesheconombank (VEB) is looking to secure a $500 million loan and oil major LUKOIL LKOH.MM is also thinking of borrowing money, banking sources have said this week.

Central bank's first deputy chairman Alexei Ulyukayev said this week that net capital inflow is likely to hit $40 billion for the year as a whole, despite an outflow of $2.4 billion in the first five months.

"This is a signal that the central bank expects an inflow of capital, and this decision reflects their decisiveness in fighting inflation," said Natalia Orlova, analyst at Alfa Bank.

The central bank's inflation-fighting arsenal also includes the rouble -- held in a managed float against a dollar/euro basket -- and interest rates.

So far this year it has raised rates four times, taking the key repo rate to 7.0 percent in July. But with overnight interbank borrowing costs MOSPRIME at around 4.5 percent, few institutions regularly borrow from the central bank, limiting the effect of its rate hikes on inflation.

Rouble appreciation is arguably a better tool, but the central bank is reluctant to let it strengthen too much due to fears of speculative capital inflows.

So far in 2008, the central bank has allowed the rouble to strengthen by around 1.02 percent against the 0.55 dollar 0.45 euro basket, and economists forecast another 0.5 percent appreciation by year-end.

The central bank estimates that a 1 percent appreciation of the rouble shaves 0.4 percentage points off inflation.

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