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. Last Updated: 07/27/2016

Central Bank Provides Lenders with Liquidity

The Central Bank provided commercial banks with short-term liquidity at 6.18 percent for the first time in more than four months on Wednesday amid soaring money market rates.

The Central Bank said it had injected 22 billion rubles ($858.4 million) into the banking system through its repurchase operations whereby banks borrow from the Central Bank using approved sovereign and corporate bonds as collateral.

Banks are flush with petrodollar liquidity and can normally easily borrow from each other at rates around 2-3 percent. The money market rates briefly go up each month at times of corporate tax payments. On Wednesday, the day of the social security tax payment, money market rates went up to 7 percent, and the Central Bank held its first repo auction since March 30.

A sale earlier Wednesday of almost 20 billion rubles worth of OFZ treasury bonds maturing in 2018 at a hefty premium to the market contributed to the liquidity squeeze.

The Central Bank hiked its short-term deposit rates by 1/4 percentage point at the start of this week as it seeks to curb inflation, threatening to overshoot the annual target of 8 percent. The measure is also aimed at soaking up excess money.

Excess liquidity from petrodollar and capital inflows makes it hard for the Central Bank to tightly control the money market. It says once liquidity flows dry up the repo rate will become its main interest rate for steering the money market.

Russia saw the first sign of the global liquidity crunch when stock markets started falling and Gazprom had difficulties pricing its 30-year eurobond but has so far sailed through relatively unscathed.