What did the CBA?
In April and may of this year the Bank of Russia began to sell Federal loan bonds (OFZ) from its own portfolio in the stock market, reported the press service of the Central Bank. Through these operations, the regulator took the banks free money. The Central Bank has not announced the volume of bonds sold, but the fact told only after the fact. This caused dissatisfaction among the market participants. In particular, Credit Suisse economist Aleksei Pogorelov told Bloomberg that he views the actions as a negative regulator factor which does not allow to correctly assess the value of the securities. According to him, the main problem is the opacity of the operation.
According to analyst ING Dmitry Field, the regulator can implement the paper in the amount of 50-100 billion rubles the Bank of Russia on the government securities was 207 billion RUB at the beginning of the year, announced on Wednesday, may 11, the Deputy Minister of Finance Maxim Oreshkin. He also added that the operation was coordinated with the Ministry of Finance, and is almost completed: most of the planned has already sold.
Selling OFZ bonds in such volumes is relatively new to the Central Bank the tools it uses to control liquidity in the banking sector in addition to the main operations of monetary policy. “Before the crisis, 2014 the regulator to sell OFZ bonds, but these were small volumes; the last time was in 2011, the Central Bank has sold government securities worth about 10 billion rubles”, — said the chief economist for Russia and CIS “Renaissance Capital” Oleg Kuzmin.
Why the Bank of Russia takes “extra money”?
Selling BFL needs to help the Bank of Russia to take the banks have accumulated “excess dollars”. Due to an excess of liquidity the market is falling interest rates, and this puts companies that are trying to attract financing in a difficult situation: banks prefer to keep money on Deposit at the Central Bank, where the rate is higher, not to buy bonds of companies. Now the borrowing rate for companies of the first echelon fell below the Deposit rate of the Central Bank, as shown by the recent placement of bonds of “MegaFon”. In such a situation, in theory the banks accumulated money does not flow into the real economy and not work for its growth. In Russia there is no such, investors are buying up any company releases any bets. However, according to the Central Bank, for January—March 2016 total amount of loans in the economy decreased by 2.4%.
In a stagnant economy, low interest rates lead to inflation, which fears the Bank of Russia, which aims to reduce inflation from the current 7.3 to 4%. To do this, the regulator keeps key rate at 11%. “With surplus liquidity rates in the market decline below the key, and therefore, regardless of the desire of the Central Bank monetary policy beginning to soften, that could be a threat to inflation targets”, — said in April, the head of the Department of studies and forecasting of the Central Bank Alexander Morozov (quoted by “RIA Novosti”).
“In addition, there is a risk that the “extra money” will go to the foreign exchange market, and this can lead to a new round of volatility of the ruble and, consequently, to higher inflation,” says chief economist at FG BCS Vladimir Tikhomirov. Of the Central Bank, he said, trying not to allow it, to not have again to help banks. “In 2014, when the ruble fell sharply, the banks had a lot of obligations in foreign currency. They were in a difficult situation, and the regulator had to save them through the mechanism of currency REPO”, — reminds economist.
Where banks have “extra dollars”?
Analysts have directly linked the growth of ruble liquidity in the banking sector with the Federal budget deficit, which the Finance Ministry is financed from the Reserve Fund. “In 2015-2016, the Treasury and the Federal subjects of the Russian Federation have become much more active place funds on deposits, which is one of the sources of inflow of liquidity at the beginning of the calendar year”, — stated in the materials prepared by the Association of regional banks “Russia”. In particular, the decrease of the account balances of the expanded government, the Central Bank added in 2015 banking sector liquidity in the amount of nearly 3.1 trillion, about a trillion banking sector due to currency interventions of the Central Bank and reduce cash in circulation.
“This is money supply in the banking sector”, — says Denis Poryvai from Raiffeisenbank. But last year the money did not lead to the emergence of surplus liquidity, because banks used them to repay debts to the Central Bank, says the analyst.
In April, the Ministry of Finance for the first time since the beginning of the year used 390 billion rubles from the Reserve Fund to Finance the budget deficit. The expenditure of the Reserve Fund is a kind of “emission free”, and does not depend on the current level of interest rates — in contrast to the issue of domestic debt, the analyst said ACRE Dmitry Kulikov.
What is a structural surplus of liquidity?
A structural surplus of liquidity means that the money from the banks increases so much that they are no longer interested in attracting funds of the Central Bank, but on the contrary, are themselves its creditors, placing excess liquidity on Deposit and correspondent accounts. The reverse situation — a structural liquidity deficit of the banking sector in which banks face the need to obtain refinancing from the regulator. In the latter case, the Central Bank can act as a donor for the banking system, by providing resources, in particular, for lending to the economy or, conversely, reducing the volume of refinancing, for example, to limit the influx of rubles on the currency market. According to the Association “Russia” in 2015, the regulator reduced the amount of liquidity that it provides to banks, by 3.6 trillion rubles.
The danger of the structural surpluses that partly of the Central Bank loses control over the process of liquidity management, so as to not affect the banking sector through the interest rate. “We already have large banks which practically do not depend on resources of the Central Bank and provide a long-term credit resources at a rate even below the Deposit rates of the Central Bank”, — said Denis Poryvai. Practically, this means that the regulator loses control over monetary policy and the initiative goes to the side of the banks.
When the market reaches the structural surplus?
With the further growth of level of rouble liquidity can be a situation where the banks will be placed on the correspondent accounts and deposits Central Bank funds more than attract the regulator on REPO transactions and loans secured by non-marketable assets. In fact it has already happened. According to analyst FK “URALSIB” Irina Lebedeva, at the beginning of the year, the volume of the structural deficit of the banking system amounted to about 2 trillion rubles In April—may there were days when the volume of funds attracted by banks in the Central Bank was lower than the volume of placed their money.
Government borrowings in numbers
1 trillion rubles will be the amount of borrowings of the Ministry of Finance in 2016
300 billion rubles will amount to a net placement of government bonds given the maturity of the old OFZ
Of 1.73 trillion rubles held in banks by the Central Bank on may 12, 2016, including 318,9 billion in deposits
With 3,76 trillion to 946,6 billion rubles decreased the volume of banking sector liabilities to Central Bank with the beginning of the year
5 trillion rubles is the total volume of the OFZ market
207 bn was the volume of government bonds held in portfolio of the Bank of Russia, at the beginning of 2016
Of 2.89 trillion was in the Reserve Fund may 1, 2016. In April of this year, the Finance Ministry spent from the Reserve Fund to Finance the Federal budget deficit to 390 billion rubles.
Source: CBR, Ministry of Finance, calculations “the Capital Renaissance”
“Now the net debt of banks to the Central Bank close to zero, and in the middle of this year will reach a surplus of liquidity,” — said Denis Poryvai. “OFZ yields falling, now bonds are trading lower 11% per annum. This suggests that monetary policy aimed at lowering inflation, gradually loses its effectiveness”, — says the analyst.
“If we do not take into account the banks’ debts to the Ministry of Finance and Federal Treasury, in the banking system have long observed structural surplus”, — agrees Irina Lebedeva. As she expected, on the horizon one to two months a structural surplus can become sustainable.
According to estimates of the Ministry of Finance and Bank of Russia Russian banking sector may move from the state structural deficit of liquidity in a situation of surplus in the second half. Meanwhile, the Minister of economic development Alexei Ulyukayev said that the surplus liquidity has been observed since February.
Will affect the situation selling OFZ controller?
In General, the sale by the Bank of Russia OFZ is unlikely to dramatically affect the market. Evaluation of Denis Breaking, the Central Bank can implement OFZ in the amount of about 200 billion rubles. “This is a very modest amount, which fundamentally has no impact. It looks significant only compared to a net placement of government securities by the Ministry of Finance this year — about 300 billion rubles”, — says the analyst.
According to Breaking, to absorb liquidity coming into the banks from the budget of the Central Bank in addition to sales OFZ may also reduce the limits on the auction tools that will allow you to withdraw from the banking system an additional 1.3 trillion rubles., but this is not enough. “But Deposit auctions is a less effective tool, since the demand for such instruments will, unless the banks will be sure that the ruble will weaken, while interest rates on long-term instruments will decline,” notes the analyst.
Assessment Dmitry Kulikov used by the Bank of Russia of tools, including not only the sale of BFL, will be enough to prevent surge as monetary inflation next year, and the excess liquid rubles participation in the foreign exchange market. Kulikov believes that inflation for the year will be in the range of 6.5–7.5%, and the average annual ruble exchange rate in the conservative oil around $40 per barrel may be in the range of 68 to 72 rubles per dollar.
What will happen to interest rates?
A structural surplus of liquidity directly affects the rates that banks are willing to pay on deposits of population and companies: they are reduced. When a lot of money, nobody will pay for them high interest rates. Analyst PSB Dmitry Monastyrshin predicts that by the end of the year average interest rate on deposits will continue to decline and may fall by another 1.5 percentage points compared to the current value.
According to the Central Bank, since the beginning of the year the average interest rate on deposits in the ten largest credit institutions fell from 9.99 to 9.75%.