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However, as we noted earlier, the summer slowdown in inflation has stopped, and in autumn it was accelerated. Herewith, already on June 30 the Bank of Russia decided to terminate interest rate reductions. We believe that the termination of interest rate reductions was a timely decision. Moreover, the acceleration of inflation in late 2010, it is expedient to raise the issue of tightening monetary policy, as the current low interest rates t the background of excessive liquidity in the banking system encourages credit institutions to take additional risks, despite the fact that the economic situation in Russia is still far from favorable. In addition, a soft monetary policy is not helpful in inflation curbing, which acceleration is based on both, non-monetary and monetary factors. We believe that this low inflation at the level of no more than 4-5% per year should be an important factor in the growth of savings and investments in the Russian economy.

We should also note that during the crisis, interest rates of the Central Bank first began to work as a tool of monetary policy. This proved to be the result of increasing share of credits, provided by the Bank of Russia in the form of liabilities to commercial organizations, to Section 2.

Monetary-Credit and Budgetary Spheres whom the crisis resources, available to the RF Central Bank, were practically the only source of relatively inexpensive funds. However, by mid-2010, commercial banks have returned to the Bank of Russia nearly all borrowed funds. Therefore, the possibility of the RF Central Bank to take the situation in the monetary market under control with interest rate policy once again declined. In this situation, to reduce inflation, the Bank of Russia should reduce its intervention in the foreign exchange market, smoothing only the exchange rate volatility, but not increasing (or decreasing) the volume of international reserves, thereby affecting the monetary supply. We should also note, that the sterilization of the Central Bank intervention in the foreign exchange market also provokes problems (see an insert), a detailed discussion of which is beyond the scope of this review.

The Problems of the effectiveness of the Central Bank Sterilized Interventions The basic macroeconomic models suggest the ineffectiveness of sterilized interventions of the Central Bank1 (i.e., the interventions in which the operations of the Central Bank in the foreign currency market do not lead to a change in the monetary base) to control the exchange rate, since such interventions domestic interest rates do not change, and according to the classical model of the formation of the exchange rate in the foreign exchange market rate also remains unchanged2. However, there are entire classes of models, which showed that sterilized intervention can influence the foreign currency market. Herewith, there are two main channels of influence - the portfolio balance channel and the channel of expectations (or signaling channel).

Portfolio balance channel is usually considered in the model determining the exchange rate on the market based on comparing the economic agents profitability of investments in domestic and foreign financial assets (with the expected exchange rate changes). The differential yield is the inflow of capital to the country, which is more attractive in terms of asset returns, that leads to a strengthening of the national currency. However, in contrast to classical models of the countries, in which the assets of different countries are perfect substitutes, when considering the portfolio balances, it is assumes that economic agents pay attention to other characteristics of assets, other than returns. For example, sterilized intervention of the Central Bank in developing countries, aimed at preventing the national currency strengthening and at purchasing foreign currency in the market, may become effective due to the fact that investors consider the assets of developing countries as more risky than the assets of the developed countries.

The channel of expectations (or information channel, signaling channel) consists in the fact that sterilized intervention, without causing changes in the monetary supply, is still able to exert significant influence on the expectations of economic agents, as an intervention enables market participants to have information about the current (and future) behavior of the Central Bank. In other words, as the behavior of the players in the foreign exchange market is largely determined by their expectations about future dynamics in exchange rates, changes in expectations can significantly adjust the behavior of investors. In particular, if the national Central Bank holds sterilized interventions to support the national currency and market players believe in its ability to keep the exchange rate, then its actions may be successful, despite the fact that the interventions did not affect the monetary supply.

Other measures of monetary and credit policy, implemented by the Bank of Russia in 2010, include the following basic steps.

1. On March 19 the Bank of Russia reported that since May 1 limits for credit risk established for credit institutions to provide loans without collateral will be lowered. In other words, the Bank of Russia has reduced the maximum amount of loans granted to credit insti See, for instance: Krugman P., Obstfeld M. International Economics: Theory and Policy. 8th ed. 2009.

See: Sarno L., Taylor M.P. Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work // Journal of Economic Literature Vol. XXXIX. September 2001.

RUSSIAN ECONOMY IN trends and outlooks tutions. This step was aimed at cutting down the anti-crisis measures to support the banking sector.

We would like to note, that at the background of the economic situation stabilization in the country the indebtedness of lending institutions under the loans without collateral has decreased as it is. The majority of credit institutions have tried to reimburse the unsecured loans because of their high cost and the opportunity to attract market financing on better terms.

Thus, we can assume that most of the remaining debt belongs to the banks that are still in a difficult situation. With the account to consolidation in the Russian banking sector, the measures taken will contribute to force out inefficient banks from the market.

2. On June 3, The Bank of Russia reported on the approval of Bank of Russia regulation 2459-U of 03.06.2010, "On the Specifics of credit risk on some outstanding credits, loans and similar debts. In accordance with that Regulation, the Bank of Russia is slowly returning to the pre-crisis requirements to in the credit risk assessment. The mitigated reserve requirements to the loans, imposed during the crisis, were aimed at supporting Russian banks and allowed them to form a smaller volume of reserves in a crisis situation. Currently, the state of the banking sector has improved, and it allows the regulator to tighten the requirements to credit risk assessment, bringing them in line with general regulations.

3. On June 7, the Bank of Russia has informed on improving its information policy : from the above date the RF Central Bank started to disclose the information not only on the aggregate amount of intervention in the foreign exchange market, but also on the amount of socalled targeted interventions. We would like to recall, that the volume of targeted interventions are not considered by the Bank of Russia for adjusting the boundaries of floating exchange rate threshold, and are regulated by the situation with the Russian main exports in the world market. In fact, while maintaining oil prices at the current or higher level, the target interventions are the main channels for the formation of the monetary supply in the Russian Federation (like it was before the crisis).

Subtracting targeted interventions from the total amount of interventions, one can get the value of interventions, committed in excess of the established volume. Herewith, the Bank of Russia in its statement officially informed about the rules of such interventions: in case of the volume excess over the planned interventions in the value of USD 700 million, adjustment of the permissible threshold of the two-currency basket is made by 5 kopecs.

We believe that increasing the information transparency of the Bank of Russia is welcome.

Such measures increase the confidence of economic agents to monetary policy the Bank of Russia, and help to increase its effectiveness. However, the establishment of clear rules of the exchange rate policy of the Bank of Russia is not quite justified in terms of high dependence of the Russian economy on foreign economic conditions, as the predictability of Bank of Russia in the foreign exchange market can create the preconditions for increasing the volatility of the exchange rate. For example, increasing the inflow of foreign currency to Russia the players of the foreign exchange market will know that the Bank of Russia will buy a certain amount of currency, and then increase the ruble rate. At the same opportunities to gain on ruble strengthening will rise in comparison with the situation in which the Bank of Russia are less predictable. It is reasonable to transfer to a free floating exchange rate of the ruble coupled with the smoothing of a sharp exchange rate fluctuations.

4. From October 13 the Bank of Russia has symmetrically extended operating range of valid value the two-currency basket from RUR 3 to 4 and reduced the amount of accumulated interventions, leading to the shift in the operational thresholdl by 5 kopeks, from UDF Section 2.

Monetary-Credit and Budgetary Spheres million to 650 million. In addition, the RF Central Bank has revoked the fixed threshold for the allowable fluctuations of the two-currency basket (RUR 26 and 41), which were estblished on January 23, 2009.

Thus step of the RF Central Bank has demonstrated its commitment to stop intervention in the foreign exchange market situation and the transition to a regime of free floating of the ruble rate. At the same time, the Bank of Russia intends to continue to mitigate the significant ruble fluctuations. We would to note, that this step can be generally welcomed, as the maintenance of the ruble, coupled with the transition to inflation targeting (see the insert), as well as the free movement of capital is a difficult challenge. We believe that in future the Bank of Russia should further reduce the scale of its operations in the foreign exchange market. In this case, the RF CENTRAL BANK in a volatile export prices will inevitably be present in the foreign exchange market, smoothing out fluctuations. Herewith, the RF CENTRAL BANK will inevitably interfere in the foreign exchange market in a stable situation there. There is concern that in case of a sustained trend towards the strengthening or weakening of the national currency, the Bank of Russia may revert to targeted exchange rate, which would nullify its actions on the transition to inflation targeting with the help of interest rates.

Inflation Targeting Inflation targeting is a relatively new regime of monetary policy, which nevertheless is now widespread in the world. For the first time about the transition to a direct inflation targeting was informed by New Zealand in 1990, later the regime was adopted by the monetary authorities in Canada, Britain, Sweden, Finland, Australia, Spain, Israel, the Czech Republic and Chile. In Russia, some elements of inflation targeting were declared by the RF CENTRAL BANK in 1996.

In most cases, the transition to inflation targeting was the answer to those difficulties the country faced in conducting monetary policy with exchange rate monetary instruments targeting. For several years, inflation targeting was used exclusively in developed countries, but at the end of 1990 it started to be be applied by developing countries and countries with economies in transition.

Inflation targeting involves several elements. These include:

1) public announcement of medium-term target inflation indicators;

2) the institutional choice of price stability as the primary long-term goal of monetary policy;

3) the communication strategy that pays less attention to the intermediate goals;

4) greater transparency in the execution of monetary policy and plans of the monetary authorities;

5) increasing the responsibility of the central bank in achievement the target inflation indicators.

Inflation targeting has several important advantages. Firstly, like the targeting of monetary aggregates, it allows the monetary authorities to focus on internal problems of the economy. Since the authorities of monetary and credit regulation in this case do not establish rigid relationship between the dynamics of monetary aggregates and the rate of price growth, inflation targeting enables more flexible reaction to changes in the macroeconomic situation. Secondly, inflation targeting is more obvious and understandable to the public than the exchange rate targeting. Setting specific targets of inflation indicators increases the responsibility of the central bank for its performance and helps to solve the problem of inconsistency in monetary policy.

However, it should also be noted that the inflation targeting regime is often criticized. First, inflationary processes are not always under complete control of the monetary and credit regulation authorities. In periods of economic shocks (financial crisis, external price shocks), non-monetary factors play an important role in the dynamics of inflation and the instruments of control, available to monetary authorities, may be insufficient to achieve targeted levels of inflation. This disadvantage is particularly important for developing countries and economies in transition, where after reaching the medium and low inflation rates, the impact of the exchange rate, structural changes in the economy and prices, external shocks, etc. increases dramatically.

Second, inflation targeting implicitly assumes that the monetary authorities focus on one of the macroeconomic targets (on inflation), not paying much attention to the dynamics of other target variables (in the first place, employment and production output growth).

RUSSIAN ECONOMY IN trends and outlooks Third, there is a fairly long lag between the actions of monetary authorities and the change in price growth.

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