Bancherul - BANCI / ENGLISH / Russia: The central bank raises reserve requirements further

This morning the Russian central bank (CBR) has announced today that from July 1 it will raise its compulsory reserve requirements for commercial banks to 5.0% from 4.5% for retail deposits in roubles, to 7.0% from 5.5% for banks’ liabilities to non-resident banks and to 5.5% from 5.0% for other bank liabilities, said Danske Bank.

The CBR cited worries over inflation and excessive credit growth as the main reasons for tightening reserve requirements.

Today move aims at reducing money supply growth, and is targeted at increasing the sterilisation of excess liquidity, which partly contributes to the strong inflationary pressures in the Russian economy.

Remember that inflation currently runs at almost 15% y/y, fuelled by strong domestic demand raising energy prices. The noteworthy increase of the reserve requirements on liabilities to foreign banks could limit net private sector capital inflows somewhat, and
hence reduce appreciation pressures on the rouble to some extent.

This is the third obligatory reserves increase since the beginning of the year. These moves from the CBR point to its willingness to deal with the rising inflation issue. It is now again possible for CBR to do so as the liquidity strains which were very much visible in H2 2007 have now become less of a concern in the banking sector.

Today monetary tightening should be welcomed, and in our view it underpins the central bank credibility. Although the move will not in itself eliminate inflationary pressures, it should be viewed as one of out many steps to cool off the economy. Going forward we expect more such steps to be taken - including a tightening of the planned fiscal spending
in 2009, said Danske Bank.