Structural liquidity surplus to persist in Feb, deficit may return at times - Central Bank
MOSCOW. Feb 13 (Interfax) - The structural liquidity surplus that emerged in the Russian banking sector in the second half of January will persist in February, but there could be a temporary return to a structural deficit at times, the Central Bank said in its January commentary on banking sector liquidity and the financial markets.
A return to deficit would "depend on demand by individual banks for liquidity as the result of Bank of Russia decisions to adjust the competition of reserve requirements coming into effect, and on the Finance Ministry's plans to finance budget spending and its decisions regarding the possible easing of requirements for banks participating in the Federal Treasury's deposit auctions," the Central Bank said.
"As before, the structural liquidity surplus is expected to grow by the end of 2017 due to the planned expenditure of the sovereign funds this year to finance the federal budget deficit," it said.
The liquidity surplus arose in the second half of January after funds were deposited with banks in connection with the return of cash funds after the New Year holidays and Central Bank operations to buy monetary gold. Liquidity inflow due to growth in bank debt on deposit operations and Federal Treasury REPO deals, and due to the transfer of funds for one-off pension payments and other budget expenditure, was offset by outflow of funds from banks to remit taxes from client accounts.
The regulator held weekly deposit auctions to soak up excess liquidity. However at the end of the month a current liquidity deficit emerged as clients paid a substantial amount of tax. The Central Bank responded to this by holding a fine-tuning REPO auction. As a result of its actions to manage banking sector liquidity in January, overnight lending rates stayed close to the Central Bank's key rate.
The Finance Ministry's forex purchases or sales on the currency market will not have a major effect on liquidity. In the year as a whole, the effect of this will be neutral if budget spending remains at the planned level. When banks transfer to windfall oil and gas revenue arising when Urals crude trades above $40 to the barrel the budget, there will be some outflow of liquidity from the sector. The Finance Ministry's FX purchases will offset these flows as FX will enter the sovereign funds, and rubles will be transferred back to the banking sector. If oil trades below $40, the reverse would be true - the Finance Ministry's operations would generate liquidity outflow from banks which would in turn compensate additional expenditure of the sovereign funds.
The Central Bank will act promptly via auctions to compensate temporary inflows or outflows of liquidity that emerge due to a lag between transferring revenue to the budget and the Finance Ministry conducting FX operations. This will keep money market rates close to the key rate.
