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. Last Updated: 07/27/2016

Bank Mulls Lower Rate To Increase Liquidity

A Central Bank plan to introduce a new, lower lending rate to commercial banks could inject much-needed liquidity into short-term money markets, but the idea is still in the drafting stages, bank officials and analysts said Tuesday.


A Central Bank spokesman said Tuesday bank officials are discussing replacing the current, largely symbolic refinancing rate with a base charge on which further types of interest rates would be based -- a system that would be comparable to more sophisticated financial rates set by Western central banks.


The idea is to "simply push one rate into a few different rates," said spokesman Alexei Sitnin, agreeing that one factor in the discussions is the need to inject greater liquidity into money markets.


Banks now prefer to borrow from each other rather than the Central Bank because of the high refinancing rate, trimmed to 120 percent from 160 percent earlier this month.


But interbank lending has been shaky since a credit crunch last August, and government officials have conceded in recent days that the country's entire banking system is in fragile health.


The Central Bank spokesman said a decision on establishing a new rate should be made within a month.


Sergei Dubinin, chairman of the Central Bank, said Monday that the bank will introduce a base rate by April 1.


But a Dubinin deputy, Sergei Alexashenko, said Tuesday that "no decision has yet been made."


One analyst said the Central Bank's participation in the money markets was a necessary, but not sufficient, factor to increase liquidity and solidify the country's banking system.


"The idea here is that this market would become far more competitive and liquid with some participation by the Central Bank of Russia," said Donald Green, managing director of the PlanEcon research consultancy.


"To the extent that that happens you get a much more active, liquid overnight market and that's a positive step, but it takes more than Central Bank action to make that happen," he said in a telephone interview from New York.


He added that banks themselves might not be liquid because of high holdings of state treasury bills, or GKOs.


The Central Bank spokesman said the new rate could be a benchmark for Russian versions of repo and Lombard rates. Those rates are used by Western central banks to make short-term loans to commercial institutions, backed by collateral such as government securities.


Russia's Central Bank would likely use GKOs as collateral on the loans, sources said.


But Green said the Lombard rate is a sophisticated money market implement not likely to hit Russia any time soon.


"I think in the case of Russia to talk about a Lombard rate is really premature," he said.