Key Interest Rate Research Articles

Central Bank Communication in the XXI Century: A Survey of Theory and Evidence

After the recent global financial crisis, central banks in advanced and developing economies found themselves unable to stick to their mandate goal of price stability by resorting to traditional instruments of monetary policy. When key interest rates approached the zero bound, the need to develop a new toolkit of liquidity provision arose. Central banks embarked on numerous non-standard monetary policy measures aimed at ensuring financial stability and restoring economic growth. Communication has become an effective auxiliary instrument of economic policy, and markets started paying precise attention to the way central bankers report information regarding the future path of monetary policy. The purpose of this paper is to provide an overview of recent trends and developments in central bank communication strategies. By resorting to the existing literature, we analyze the origins of central bank communication and the evolution of its role in time. We also study the main instruments of communication strategies of large central banks. In the final part of the study, we investigate the communication strategy of the US Federal Reserve and the way it may cause spillovers to fragile markets abroad. We outline at least three major channels of international policy transmission: through stocks, bonds and exchange rates fluctuations.

The determinants of the benchmark interest rates in China

This paper empirically investigates the determinants of the two key benchmark interest rates in China using an array of constrained ordered probit models for quarterly frequency data from 1987 to 2013. Specifically, we estimate the behavioral equation of the People's Bank of China that models its decision-making process for revisions of the benchmark deposit rate and the lending rate. Our findings imply that the PBC's policy decisions are better understood as responses to changes in inflation and money growth, while output gaps and the exchange rate play negligible roles. We also implement in-sample fit analyses and out-of-sample forecast exercises. Our empirical findings show robust and reasonably good performances of our models in understanding dynamics of these benchmark interest rates.

Возможности процентной политики центральных банков

After the Bank of Russia had switched to inflation targeting, its key rate became the main instrument of monetary policy. Based on the experience of both developed and developing countries, the authors conclude that besides regulating the key interest rate monetary authorities have a wide range of interest rate policy instruments. By regulating the width of the interest rate corridor and the location of the key rate within the corridor, monetary authorities get the opportunity to manage not only the level of the target interest rate and its volatility, but also to influence transnational capital flows. Interest rate instruments known since early 1990s were widely used by inflationtargeting monetary authorities during the crisis of 2008–2009 and the post-crisis period, when many of them experienced an increase of short-term foreign capital inflows and exchange rate volatility, which entailed increased risks for price and financial stability. The authors also confirm the significant role of such a traditional instrument of monetary policy as required reserves. Monetary authorities of developing countries use them to regulate monetary conditions in order to eliminate imbalances in the structure of credit organizations’ liabilities and, first of all, for the purpose of dedollarization and stimulation of the attractiveness of long-term deposits in national currency. According to the authors, widening the spectrum of interest rate instruments used by the regulator will help increase the flexibility and effectiveness of the Bank of Russia’s monetary policy.

SVAR description of ECB monetary policy effects via banking sector in individual EA countries: case of Slovenia

This paper constructs structural vector autoregression (SVAR) model for individual EA member states that is able to capture effects of European Central Bank's (ECB) unconventional measures. We separately model innovation to ECB key interest rate representing standard interest rate policy as exogenous variable and effects of balance sheet policies through change in claims against domestic sector of individual central banks as endogenous variable. By incorporating banking sector, we specifically examine effects of monetary policy on credit provisioning in individual countries. This model is applied on Slovenian economy after the euro adoption in 2007. Our results suggest that while standard interest rate policy has an effect on long-term interest rates for government bonds and interest rates on loans to households, the balance sheet policy brings about an additional impulse affecting bank interest rates but fails to affect bank spreads, government bonds or directly the credit provisioning.

МЕТОДЫ ЭФФЕКТИВНОГО УПРАВЛЕНИЯ КРЕДИТНОЙ ОРГАНИЗАЦИЕЙ НА СОВРЕМЕННОМ ЭТАПЕ

A number of scientific and practical aspects of assessment of efficiency of activity of commercial bank is considered. On the basis of the conducted research authors gives offers on increase in bank income and decrease in risk on the basis of banking products with the built-in options. By results of the conducted research the conclusion on influence of change of a key interest rate on income of commercial banks at management of liquidity in the conditions of percentage risk. Methods of modeling of interest income of bank are presented.

Modern tendencies of the Ukrainian banking system development

The article considers the main tendencies of financial globalization as an all-encompassing process of the world community transformation into an open integrated system of information-technological, financial-economic, socio-political, and socio-cultural interrelations and interdependencies, as well as dialectical interaction of national and global social processes. The main current trends of the Ukrainian banking system development for the period 2016–2017 were researched, which was expressed in accelerating lending to businesses and the population; a key interest rate cut by the National Bank of Ukraine, which creates positive conditions for improving the economy, reducing interest rates on deposits, increasing retail lending and portfolio growth loans to individuals. The Ukrainian banking system is gradually integrated into the international banking system and forms its development pattern in the way of integration processes, taking into account the complexities of the external financial environment.

Assessment of Availability of Consumer Loans in the Regions of Russia

Introduction The development of Russia's banking sector has been very uneven in the recent 15 years. Major crises in the economy (for example, the crises of 1998 and 2008) led to the bankruptcy of some largest banks. The economic reform, which has been undertaken lately, opened a new stage and goals in the development of the banking system. The pre-crisis state of the economy stimulates an increase in the number of loans granted to individuals, i.e., consumer loans. Consumer loan is one of the most common types of banking activities in developed Western countries. It should be mentioned that the scope of application of consumer loans is significant, as they are used not only to buy durable goods, such as cars, appliances, etc. For example, buying property in installments is basically also one of the varieties of long-term consumer loans; current purchases made with credit cards are not inferior to the use of consumer loans, as far as large purchases are concerned. Consumer loans are very widespread in industrialized countries primarily because owing to the use of this technique to finance purchases market capacity on a range of consumer goods and real estate is greatly increasing. Without limiting the preceding, in ongoing conditions availability of credit resources of commercial banks is very appealing to individuals, as there is a tendency of decreasing the key interest rate of the Central Bank of the Russian Federation. It has been 10% since 19 September 2016. The results of the research can be used to smooth out the uneven availability of credit resources in different regions of Russia and, as a result, their unbalanced development, as well as for the balanced development of the Russian economy on the whole. Data and Methods Consumer credit market in Russia is going through lean times (Natocheeva and Rusanov, 2016; Molodyko, 2015; Gerzelieva, 2016; Rusanov et al., 2015; Sharma, 2014; Sibirskaya et al., 2016). This is evident from the data presented in Figure 1. According to the Bank of Russia, there was a significant reduction in the volume of loans in January 2015 compared to January 2016, and this figure fell by 6.4%. The largest volume of loans was provided in January 2015 (11,028,783 mln. roubles), and then gradually decreased until it reached the minimum of 10,318,928 mln. roubles in April 2016. According to Figure 1, we can also notice a slight increase in the cost of loans granted to individuals. Thus, in July 2016 individuals received loans for a total amount of 10,365,553 mln. roubles. As far as the volume of loans granted in foreign currency is concerned, a negative dynamics can be traced there as well (Figure 2). The drop in volume of loans is not as rapid as the one in the national currency. For example, in February 2015 the volume of loans increased by 19.9% and amounted to 360,690 mln roubles in comparison with January of the same year, which is the highest value in the period from January 2015 to July 2016. The lowest value was recorded in July 2016 and amounted to 207,365 mln roubles. The slowdown in growth of the loan market to individuals is to a greater extent due to the financial crisis in 2014, which resulted in a decrease in personal income, rising prices, weakening the rouble as well as an increase in interest rates. One reason for the decrease in the volume of loans to individuals is the loss of credibility to consumers (Sysoeva, 2015; Tursunov, Sergeyeva, 2016; Arslan-Ayaydin et al., 2014; Nechaev and Antipina, 2016), which is caused by an increase in the number of loans to cover arrears. Thus, according to Fig. 3, it can be inferred that the share of loans to cover arrears over 90 days, granted in roubles, increased by 7.9% in January 2015 and by 10.5% in January 2016. However, this indicator reached its maximum of 10.9% in March 2016 and dropped by 0.3% and amounted to 10.6% in August 2016. Consequently, the volume of outstanding loans to individuals formed a steady downward trend. …

The Manipulation Potential of Libor and Euribor

AbstractThe London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor) are two key benchmark interest rates used in a plethora of financial contracts. The integrity of the rate‐setting processes has been under intense scrutiny since 2007. We analyse Libor and Euribor submissions by the individual banks and shed light on the underlying manipulation potential for the actual and several alternative rate‐setting procedures. We find that such alternative fixings could significantly reduce the effect of manipulation. We also explore related issues such as the sample size and the particular questions asked of the banks in the rate‐setting process.

Financial Markets and Financial Institutions in Russia in 2016

In 2016, Russia's stock market, in terms of its rates of return, set a world record among all the other stock markets. Over that year, the RTS Index gained 52.3%, and the MICEX Index –26.8% (Fig. 1). The faster growth rate of the RTS Index, which reflects the price of shares in US dollar terms, can be explained by the ruble's strengthening in 2016. The other forces behind the growth of the Russian stock indexes were the rising oil prices, the inflow of non-residents' money in response to the strengthening ruble and the stably high key interest rate, and investor expectations of recovery economic growth.

Time and frequency structure of causal correlation networks in the China bond market

There are more than eight hundred interest rates published in China bond market every day. Which are the benchmark interest rates that have broad influences on most interest rates is a major concern for economists. In this paper, multi-variable Granger causality test is developed and applied to construct a directed network of interest rates, whose important nodes, regarded as key interest rates, are evaluated with inverse Page Rank scores. The results indicate that some short-term interest rates have larger influences on the most key interest rates, while repo rates are the benchmark of short-term rates. It is also found that central bank bills'rates are in the core position of mid-term interest rates'network, and treasury bond rates are leading the long-term bonds rates. The evolution of benchmark interest rates is also studied from 2008 to 2014, and it's found that SHIBOR has generally become the benchmark interest rate in China. In the frequency domain we detect the properties of information flows between interest rates and the result confirms the existence of market segmentation in China bond market.

EDB Macroreview, January 2017 - EDB Countries Targeting Lower Inflation

EDB Macroreview, January 2017 - EDB Countries Targeting Lower Inflation

, 2017. : (EDB Macroreview, January 2017 - EDB Countries: Targeting Lower Inflation)

, 2017. : (EDB Macroreview, January 2017 - EDB Countries: Targeting Lower Inflation)

The conceptual framework of the impact of money supply on economic growth

Lately, in political and economic circles, a fierce debate on the need for additional monetary emission in Russia. The debate continues to this day. A number of economists and entrepreneurs are convinced of the need for cash injection into our economy to stimulate economic growth. They claim that lack of money hinders economic growth, because the lack of financial resources is hampering investment. At the same time criticized the Central Bank for a set them high key interest rate today at 10 %, which hampers not only investment in the real sector of the economy, but the current actual production. After all, profitability in most sectors of the real economy below 10%. Other economists, including the Government of the Russian Federation and the Central Bank of the country, hold the opposite point of view. They believe high inflation is the main constraining economic growth factor. According to them, only after a drop in inflation, the Russian economy will be able to start growth, and additional money creation will only fuel inflation. Therefore, the first step is to suppress the rising prices, lowering inflation to 4% per annum. In this direction and concentrated all the efforts of the monetary authorities, which are primarily in the key interest rate and limit the supply of money. Of course, the dispute about such issues as stimulating economic growth by an additional cash infusion, should be resolved through analysis of the theoretical foundations and the empirical data obtained in practice, as in Russia and other countries of the world.

Current trends of monetary policy of Ukraine

In the article current trends of monetary policy of Ukraine are considered. For this purpose the following key questions are considered: essence specification, evolution of development and main instruments of monetary policy; definition of the basic purpose, tendency and feature of its realization in modern conditions; a specification of the perspective directions of development of monetary policy of Ukraine for the purpose of its optimization; research of activity of the NBU as basic conductor of monetary policy. It is noted that in modern conditions the basic purpose of monetary policy of Ukraine is ensuring price stability by observance of the quantitative purposes concerning inflation, and change of a key interest rate of monetary policy, as it has the most significant effect on a condition of the monetary and credit market, acts as the main instrument of its realization. Also as the medium-term purposes of monetary policy NBU defines observance of the mode of a floating exchange rate, transparency of activity of National bank and its institutional, financial and operational independence. The analysis of statistical data concerning dynamics of discount rate of the NBU and an index of inflation is carried out. The tendency to their decrease is noted, and also the thesis about continuation of moderate mitigation of monetary policy in the medium term for the purpose of activation of process of crediting and assistance to economic growth is reasonable.

Russian Inflation Keeps Tumbling

Inflation in Russia dropped to 2.5% year-on-year in November 2017, hitting lows not seen in Russia’s recent history, in response to a good crop, Russian rouble appreciation and slow demand recovery. It appears to be unlikely that consumer price growth will leap over 2.5–2.7%. The economic contraction has prompted the Bank of Russia to double down on easing the monetary policy, cutting the key interest rate by 0.5 p.p., straight away to 7.75%, on 15 December.

The Effects of the ECB’s Unconventional Monetary Policy on the Non-Euro Area EU Member States

The paper examines the unconventional monetary policy programs and measures, implemented by the European Central Bank (ECB). The research is focused on covering their effects on the non-Euro Area Member States of the European Union (EU). The main purpose of the paper is to conduct an econometric study on the effects of the ECB’s non-standard measures on the government bond yields of the countries, part of the EU, but outside the Eurozone, through the interest rate channel of the monetary policy transmission mechanism. The study is dedicated to the empirical study on the dynamics and the relations between the key interest rates and the government bond yields of Bulgaria, Denmark, United Kingdom, Poland, Romania, Croatia, Czech Republic and Sweden. The observed period spreads from January 2010 to December 2016, with the use of monthly data. The aggregated results from the constructed econometric models for the non-Euro area EU Member States show that between 95% and 98,5% of the changes in the government bond yield can be explained by the changes in the levels of the Euro Over Night Index Average(EONIA) - an interest rate factor, and by the time – the second factor in the model. The results also show that at EONIA fixed rates the yield on the long-term government bonds can vary from -0,025 percentage points to -0,068 percentage points monthly. Conclusions and proposals are made, concerning the interest rates in the Eurozone and in the EU, in the context of the unconventional monetary policy, conducted by the ECB – one of the world’s major central banks.

Modelling the financial stability of an enterprise taking into account macroeconomic indicators

Davit S. Bidzhoyan - Postgraduate Student, Department of Business Analytics, Doctoral School of Economics, National Research University Higher School of EconomicsAddress: 20, Myasnitskaya Street, Moscow, 101000, Russian FederationE-mail: bidzhoyan_david@mail.ruTatiana K. Bogdanova - Associate Professor, Department of Business Analytics, National Research University Higher School of EconomicsAddress: 20, Myasnitskaya Street, Moscow, 101000, Russian FederationE-mail: tanbog@hse.ru Nowadays enterprises operate in a rapidly changing macroeconomic environment, and this factor should be taken into account when forecasting a company’s financial statement as a whole, or some of its particular aspects. However, development of the company’s financial stability assessment model taking into account macroeconomic factors is hampered by the problem of inclusion in the model of some factors with frequency of measurement different from that of the internal financial performance. For example, currency rates and crude oil prices can change on a daily, weekly, or monthly basis. Changes in the key interest rate cannot be characterized as systematic, since the Central Bank can vary the key interest rate depending on market conditions. Meanwhile, financial indicators of the company are published in the semi-annual and annual reports. This paper proposes an approach that aggregates macroeconomic factors, which means presenting a time series of each variable for each year, followed by the inclusion of polynomial coefficients in the final model as reference variable characteristics. The weighted average is calculated for the key interest rate, where the weights are the days during which the rate is operated. Based on the data of 291 metallurgical industry enterprises of the Volga federal district for the period 2012-2014, a financial stability assessment model has been built relying on the decision tree model using CRT (Classification and Regression Tree). The accuracy of the model is approximately 86%. The decision tree structure has served as a basis for recommendations to optimize certain financial indicators of operations to reach financial stability.

Bank of Russia Liquidity Management of the Banking Sector: Observations Based on the Past Three Years Experience

Short-term money market interest rate management within the framework of symmetrical interest rate band is based on central bank open market operations that aim to compensate for a structural deficit and surplus of liquidity in the banking sector to make sure that the money market overnight interest rate is close to the middle of the interest rate band. The Bank of Russia practice in this form of management amid structural deficit of liquidity over the past three years has shown that the period average money market interest rate has been above the key interest rate by more than 0.5 percentage points in half of 14 key rate periods.

Medium-term forecast of the dynamics of the development of the Russian economy

Based on the simulation of medium-term economic dynamics under conditions of high inflation, the article analyzes the effectiveness of the monetary policy of the Bank of Russia and presents a forecast of economic growth in the near-term outlook (2015–2018) under different scenarios of change in the key interest rate.

Monetary Policy of the Russian Central Bank: Risks and Limitations

In June, the Russian Central Bank, for the first time since summer 2015, decided to reduce the key interest rate by 0.5 percentage points, to 10.5%. The decline in inflation expectations, further slowdown in inflation and stabilization of the external environment, together with the strengthening of the rouble, allowed the Bank of Russia to soften the monetary policy.