Tag: interest rates

Can Central Banks Always Influence Financial Markets? Evidence from Russia

Tall buildings in Moscow city representing central banks and financial markets

In many financial markets, including the UK and US, central banks are able to influence asset prices through unexpected interest rate changes (so-called indirect channel of monetary policy). In our paper (Shibanov and Slyusar 2019) we study the Russian market in 2013-2019 and measure policy shocks by the difference between the key rate and analysts’ median forecast. We show that in the short-term, the Central Bank of Russia does not significantly influence the general stock market or the ruble exchange rate outside December 2014 and January 2015, while some sectoral stock indices react to the changes opposite to what theoretical models predict. Overall, the Russian case is more similar to the ECB and the case of the German economy than to results from the UK or the US. This may mean that the Bank of Russia has more influence through the direct channel on the interest rates of credits and deposits.

Asset Price Reaction to Policy Changes

What should we expect from a general stock market or a national currency reaction to the central bank interest rate policy? This indirect effect may lead to changes in the collateral available in the economy, or in imports and exports of a country. Theoretical models predict that an expected decrease in the key rate would have no impact on asset prices, while unexpected increases in the key rate may have a negative impact on asset prices (Kontonikas et al. 2013). If the interest rate increases more than the markets or analysts expect, we would see prices decrease as discount rates most probably increase; the opposite happens when the interest rate decreases more than expected.

The results of testing this presumption on different countries are not uniform. While in the US (Kontonikas et al. 2013) and in the UK (Bredin et al. 2009) the impacts of key rate policy surprises are significant, the ECB influences neither the UK nor the German stock markets (Breidin et al. 2009).

Regarding the exchange rate (Hausman and Wongswan, 2011), there is evidence that unexpected changes in the US interest rate have a strong impact on floating currencies.

The Case of Russia

Russian monetary policy has changed a lot since 2013. The introduction of the “key rate” as the main policy tool, switch to the floating ruble and inflation targeting in November 2014 all lead to a new framework used by the Bank of Russia. Therefore, it is of interest to check what happens with the indirect channel of policy transmission (through asset prices and financial markets).

There is at least one paper that precedes our research. Kuznetsova and Ulyanova (2016) study the impact of verbal interventions by the Bank of Russia (Central Bank of Russia) on both the returns and the volatility of the Russian stock market index (RTS) in 2014-2015. Their findings suggest that returns do react to the Bank of Russia communications, while volatility does not.

In our paper (Shibanov and Slyusar 2019) we study the period of 2013-2019, that is the time of Elvira Nabiullina as governor of the Bank of Russia. Our approach is based on the assumption that news are incorporated in the stock market reasonably fast, no later than 4 trading days after the day of announcement. For the exchange rate we take short-term movements 30 minutes before and after the time of publication (like in Hausman and Wongswan 2011). Monetary policy surprise is measured as the difference between the realized key rate and the median expectations of analysts in Thomson Reuters. Abnormal returns are computed using an index model.

Figure 1 shows that the surprises are close to zero except for two dates: December 2014 and January 2015. In the first period the key rate was increased to 17%, while in the second it was reduced to 15%. In the paper we show that these two days are clear outliers that bias the results, so we study the relationship without them.

Results for the Stock Market

The stock market reaction in the symmetric window of four days before the announcement and four days after is muted (see Table 1). While the main index (MICEX) does not react significantly, two sectors (MM – metals and mining, and chemistry) react positively to the unexpected increase in the key rate. This result seems to contradict what we would expect from the market. The bond index does not significantly react to the changes.

Table 1. Cumulative effect, sample with no shocks (days from -4 to +4).

Sector Estimate t-statistic P-value Significance
MICEX 1.6192 0.6803 0.4999 0.041
OG 0.2511 1.125 0.2668 0.005
Finance -1.2933 -1.080 0.2860 0.024
Energy -0.4513 -0.7145 0.4787 0.004
MM 2.2876 3.326 0.0018 *** 0.113
Telecom -0.2534 -0.2844 0.7774 0.001
Consum. 0.2178 0.4191 0.6772 0.001
Chemistry 2.9787 2.642 0.0114 ** 0.132
Transport 0.3200 0.1548 0.8777 0.001
Bonds 1.4080 1.048 0.3002 0.037

Source: Shibanov and Slyusar (2019), Thomson Reuters, Moscow Stock Exchange and Bank of Russia data.

Results for the Ruble Exchange Rate

The exchange rate should react with a depreciation to the unexpected key rate decrease. If there is an unexpected increase, the return on the ruble-denominated bonds rises and so the currency becomes more attractive to the international investors.

However, we do not observe any significant difference between the cases of expected and unexpected changes (see Table 2). All the movements are quite noisy and do not show any stable pattern.

Table 2. Exchange rate reaction to the key rate changes.

Key rate increase Key rate decrease
Unexpected -1.05% -0.04%
Expected 0.65% 0.003%

Source: Shibanov and Slyusar (2019), Thomson Reuters and Bank of Russia data.

Figure 1. Deviations of the actual key rate from median expectations (key rate surprises), percentage points.

Source: Shibanov and Slyusar (2019), Thomson Reuters and Bank of Russia data.


As we see from our analysis, the Bank of Russia’s impact on financial markets is similar to the one observed in Germany after ECB policy changes. There is almost no sizeable and stable effect neither on asset prices nor on the exchange rate.

The results do not mean, however, that monetary policy in Russia is irrelevant. The direct channel – i.e. the impact of the central bank’s decisions on the interest rates of credits and deposits works well. Moreover, we only consider short-term effects concentrated around the announcement date. Longer-term effects may be more pronounced.


  • Bredin, D. et al. (2009) ‘European monetary policy surprises: the aggregate and sectoral stock market response’, International Journal of Finance & Economics. Wiley Online Library, 14(2), pp. 156–171.
  • Hausman, J. and Wongswan, J. (2011) ‘Global asset prices and FOMC announcements’, Journal of International Money and Finance. Elsevier Ltd, 30(3), pp. 547–571. doi: 10.1016/j.jimonfin.2011.01.008.
  • Kontonikas, A., MacDonald, R. and Saggu, A. (2013) ‘Stock market reaction to fed funds rate surprises: State dependence and the financial crisis’, Journal of Banking and Finance, 37(11), pp. 4025–4037. doi: 10.1016/j.jbankfin.2013.06.010.
  • Kuznetsova, O. and Ulyanova, S. (2016) ‘The Impact of Central Bank’s Verbal Interventions on Stock Exchange Indices in a Resource Based Economy: The Evidence from Russia’, Working Paper, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2876617.
  • Shibanov, O. and Slyusar A. (2019) ‘Interest rate surprises, analyst expectations and stock market returns: case of Russia’, Working Paper.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Can Loose Macroeconomic Policies Secure a ‘Growth Injection’ for Belarus?

20191209 Can Loose Macroeconomic Policies Secure a Growth FREE Network Policy Brief Image 01

After a relatively long period of macroeconomic stabilization, Belarus faces the threat of a purposeful deviation from it. However, today there is no room for a ‘growth injection’ by means of monetary policy. Moreover, Belarus still suffers from a problem of unanchored inflation expectations. This prevents monetary policy from being effective and powerful. So, unless inflation expectations have been anchored, any discussion about reshaping monetary policy and making it ‘pro-growth’ is meaningless.

Policy Mix and Macroeconomic Landscape in Belarus

Since 2015, Belarus has considerably improved the quality of its macroeconomic policies. The country has fallen back upon a floating exchange rate, and feasible monetary and fiscal rules. This change followed a long history of voluntary expansionary policy mixes associated with numerous episodes of huge inflation, currency crises, etc.

Due to the new policy mix, the country has been displaying a movement towards macro stability in recent years. For instance, the external position is close to being balanced, the fiscal position has even become positive, while the inflation rate is at historical lows around 5%. For Belarus, these achievements are important, taking in mind a ‘fresh memory’ of price and financial instability. Hence, until recently there were no doubts in the feasibility of the commitments of Belarusian authorities to sound macroeconomic policies.

However, despite a relatively strong macroeconomic performance, the threat of a purposeful and at least temporary deviation from policy commitments seems to strengthen. What is important is that this time, popular simple explanations – e.g. political voluntarism (Belarus will have presidential elections in 2020), a naïve perception of economic policy mechanisms by authorities, etc. – are not sufficient for understanding the phenomenon. Rounds of loosening economic policies tend to be justified as ‘lesser evils’. Exploring some rationality in such a justification requires more insight into the Belarusian macroeconomic landscape.

In recent years, the lack of productivity and output growth has become more evident: in 2015-2019 the average output growth rate has been around 0. The root of the problem is the deficit in productivity and growth (Kruk & Bornukova, 2014; Kruk, 2019), while the rules-based policy mix just uncovered it.

However, this direction of causation tends to be challenged by some policy-makers. In an ’archaic’ manner, the policy mix is accused of blocking any pro-output policy discretion, even if there is a justification for it. For instance, an ‘extra’ need for a ‘growth injection’ may be justified by social challenges. Poor growth in Belarus results in a rather sensitive squeezing of relative levels of well-being in comparison to neighboring countries. Between 2012 and 2019, the well-being shrank from around 78% of the average level in 11 CEE countries down to about 63%. This intensified the labour outflow significantly, including for those employed in socially important industries, say, in healthcare. So, according to this view, the ‘growth injection’ is a lesser evil rather than systemic social threat.

A more advanced ‘accusation’ of the new policy mix assumes that it either causes a too restrictive stance of monetary policy with respect to output or that it ignores complicated transmission channels. For instance, one may argue that too much emphasis on price and financial stability can actually result in undermining them, given the huge debt burden of Belarusian firms. The quality of a considerable portion of the debts in Belarus tends to be sensitive to output growth rates. Hence, according to this argumentation, the monetary policy rule should be ‘more pro-growth’, reflecting the debt-growth-financial stability linkage inside it.

‘Translating’ this policy agenda to a research agenda results in two questions. First, is there room for a more expansionary monetary policy? Second, do financial instability risks require making the monetary policy rule ‘more pro-growth’?

The Monetary Policy Stance: Causality and Causes

Monetary policy, as a rule, aims to be counter-cyclical, i.e. generate expansionary incentives during cyclical downturns, and vice versa. In this respect, its stance should be matched to the estimate of the output gap. From this view, given dominating estimates of a near-zero output gap for 2019 in Belarus (National bank, 2019; Kruk, 2019), today’s monetary policy should be roughly neutral. However, analyzing monetary policy stance together with the estimates of the output gap is not a univocal option, especially given doubts about the consistency of any estimate of the output gap (Coibion et al., 2017).

From this point of view, a direct measurement of the monetary policy stance – matching ex-post real interest rate vs. an ex-ante one – is a worthwhile alternative. If the ex-post real interest exceeds the ex-ante rate, it means that the interest rate policy by a central bank is restrictive, while an opposite situation witnesses its expansionary stance (e.g. Gottschalk, 2001). A methodology for identifying inflation expectations by Kruk (2016) allows detecting restrictive and expansionary stances as well. Moreover, doing it in this way allows simultaneously tracing the stance of actual and expected inflation, and study its possible impact on monetary policy (Figure 1).

Figure 1. Monetary Policy Stance, Actual Inflation and Inflation Expectations in Belarus

Note: Positive sign means restrictive stance of monetary policy, while negative sign means expansionary stance.
Source: Own elaboration according to methodology in Kruk (2016) and based on data from the National Bank of Belarus.

First, this diagnostic shows that the stance of the monetary policy today is roughly neutral, which conforms to the diagnosis based on matching with the output gap. In this respect, it means that there is no room for monetary policy softening today.

However, eventually the situation may change and a need for an expansionary monetary policy may indeed arise. Can the National Bank of Belarus unconditionally satisfy such demand? Second, and the more important conclusion, is that the National Bank cannot. Figure 1 also demonstrates that the monetary policy stance in Belarus is very sensitive to the stance of inflation expectations. From this view, the restrictive monetary policy, say in 2015-2016 and 2018, reflected shocks in inflation expectations. The National Bank had to take a mark-up in the expected inflation in respect to the actual one into account and to transform it to the mark-up of the interest rate. If the National Bank ignores such shocks and nevertheless softens monetary policy, it will undermine price stability due to a powerful transmission effect from expected inflation to the actual one. Moreover, a reverse linkage from actual inflation to the expected one is likely to result in a prolonged inflationary period, causing a so-called ‘abnormal’ stance of the monetary environment (Kruk, 2016).

So, a generalized policy diagnosis for today looks as follows. Monetary policy has reached a roughly neutral level due to a considerable reduction in inflation expectations. The latter, in turn, happened due to a prolonged period of a restrictive policy stance (in 2015-2016), which suppressed actual inflation by means of sacrificing output in a sense (the period of cyclical downturn could have been shorter without such limitations in monetary policy).

Unanchored Expectations Bar a More ‘Pro-Growth’ Policy

A deeper cause of the limited room for monetary policies is unanchored inflation expectations. Statistical properties of the inflation expectations series (Kruk, 2019 and 2016), as well as the polls of households and firms by the National Bank, suggest that despite the reduction of the level of inflation expectations, the issue of it being unanchored is still on the agenda. In this respect, expected inflation in Belarus tends to be sensitive to numerous kinds of actual and information shocks, e.g. domestic and global output dynamics, interest rate levels and spreads, exchange rates, financial stability issues, etc. Hence, unless expectations have been anchored, the monetary policy would still suffer from a lack of power. This means that anchoring inflation expectations is the core precondition for normalizing the monetary environment and the power of any monetary policy.

For the monetary rule, this means that it cannot become more ‘pro-growth’, keeping in mind the risks to financial stability. Otherwise, it can spur price destabilization, which may also trigger financial instability. Hence, the logic of a ‘lesser evil’ does not work. Indeed, there are risks to financial stability stemming from poor growth. But combating them through a more ‘pro-growth’ policy will cause price instability and financial instability stemming from that. But what is more important, the logic of a ‘lesser evil’ itself is doubtful with respect to monetary policy. Recognizing the linkage between monetary policy and financial stability does not mean that risks to the latter should be directly traced by the former. Financial stability issues can and should primarily be tackled through macroprudential tools.


After a relatively long period of macroeconomic stabilization, Belarus faces some risk with respect to it. However, today’s monetary policy stance is roughly neutral in Belarus. Hence, a ‘growth injection’ may result in inflation resurgence. Moreover, even today’s near-neutral monetary policy stance is a considerable achievement, as the country still experiences the challenge of unanchored inflation expectations. This issue is a deep underlying problem, which keeps the monetary policy from being more effective and powerful. So, unless inflation expectations have been anchored, any discussion about reshaping it and making it ‘pro-growth’ is meaningless.

As for today’s justifications for monetary policy softening – poor growth and financial instability risks – they hardly relate with the monetary policy agenda. The challenge of poor growth requires thinking in terms of productivity issues, while financial stability risks in terms of macroprudential tools first.


  • Coibion, O., Gorodnichenko, Y, Ulate, M. (2017). The Cyclical Sensitivity in Estimates of Potential Output, National Bureau of Economic Research, Working Paper No. 23580.
  • Gottschalk, J. (2001). Monetary Conditions in the Euro Area: Useful Indicators of Aggregate Demand Conditions? Kiel Institute for the World Economy Working Paper No. 1037.
  • Kruk, D. (2019). Belarusian Economy in Mid-2019: the Results of the Recovery Growth Period, BEROC Policy Paper No. 69.
  • Kruk, D. (2016). SVAR Approach for Extracting Inflation Expectations Given Severe Monetary Shocks: Evidence from Belarus BEROC Working Paper No. 39.
  • Kruk, D., Bornukova, K. (2014). Belarusian Economic Growth Decomposition, BEROC Working Paper No. 24.
  • National Bank of the Republic Belarus (2019). Information on the Dynamics of Consumer Prices and Tariffs and Factors of Changes Therein, 2019Q3.

Monetary Policy Puzzle in the Presence of a Negative TFP Shock and Unstable Expectations

20170528 FREE Policy Brief - Monetary Policy Puzzle Image 01

The Belarusian economy has given birth to a very interesting phenomenon of extremely high real interest rates in a prolonged recession. Despite an expected intuitive guess about the linkage between them (high interest rates cause recession), the reality turned out to be more difficult. The era of high real interest rates was due to past mistakes in economic policy, which undermined the credibility of the latter and gave rise to high and volatile inflation expectations. However, the adverse output path following the too high interest rates was not essential. The recession was mainly predetermined by a negative Total Factor Productivity (TFP) shock. The shock itself forms a disagreeable and contradictive environment for monetary policy. Together with unanchored inflation expectations, this makes monetary policy ineffective and too risky.

Unusually high real rates and recession

Since the painful currency crisis of 2011, the Belarusian monetary environment has become extremely vulnerable in many respects. In 2011 and early 2012, the country faced (once again) a 3-digit inflation rate. While the inflation rate later went down gradually, it was not sufficient to enhance monetary stability in a broader sense. For instance, for nominal interest rates, the level of 20% per annum was an unachievable lower bound until 2016. Moreover, in 2013­­—2016, upside jumps in the nominal interest rates took place regularly (see Figure 1).

Figure 1.Nominal interest and inflation rates, % per annum

Source: Belstat. Note: Inflation rate is calculated on average basis for last three months on a seasonally adjusted basis and then annualized

Such combination of nominal interest and inflation rates has resulted in an extremely high and volatile level of real interest rates throughout the last 4 years. Real returns at the Belarusian financial market fluctuated in 2013—2016 within the range of 10-30% per annum. For instance, a median (monthly) value of the real interest rate on new loans in 2013—2016 was 17.6% per annum (in the beginning of 2017 it approached the level of 8-10% per annum). So, one may say that the real monetary conditions have been extremely tight in the last couple of years.

At the same time, in 2015—2016 Belarus has dipped into a prolonged and deep recession. During the last two years, the country has lost roughly 7% of its output. The combination of high real interest rates and a recession gave rise to a naive, but acceptable diagnosis: the excessively high interest rates caused (or at least contributed to) the recession. This view became popular in the domestic policy discussions. Furthermore, often this story transformed into a claim that ‘too tight monetary policy causes (or at least contributes to) recession’. Given this pressure, the National bank of Belarus (NBB) became accustomed to justifying its policy stance by considerations of financial stability given financial fragility. So, the economic policy discussion got into the discourse of these two extremes. Finally, it boiled down to the question whether ‘the monetary environment has stabilized enough in order to soften monetary policy’.

However, a naive story about the stance of monetary policy and the business cycle is not (fully) true in the case of Belarus in several respects.

Unanchored expectations drive interest rates

First, high interest rates at the financial market were not because of the excessively high policy rate of the NBB. It happened due to volatile, but still persistently high inflation expectations (Kruk 2017, 2016a). The latter visualized the loss of monetary-policy credibility by the general public.

Before 2016, the level of inflation expectations was persistently higher than the actual inflation, demonstrating an extremely slow (if any) convergence (see Figure 2). At the same time, the ex-ante level of real returns has remained relatively stable. When setting its policy rate, the NBB has taken into consideration existing inflation expectations, otherwise the high expected inflation would have been realized.

Figure 2. Actual and expected inflation, %

Note: Expected inflation has been estimated according to the methodology in Kruk (2016a).

So, in the recent past, the stance of the monetary policy could hardly be accused of generating too tight monetary conditions through the setting of an improper policy rate. The problem was (is) more severe, and one can argue about the inability (and the lack of willingness) of the NBB to anchor inflation expectations.

However, in the late 2016 and early 2017, the expected and actual inflation rates converged, mainly due to a contraction of the former. This introduced more stability into the monetary environment, in a broader sense. Kruk (2017, 2016a) shows that the turn of 2016—2017 has become a breakpoint for the monetary environment to return into a ‘normal’ stance (see Figure 3).

The NBB reacted to the milder monetary environment by a number of reductions in the policy rate (from 18% since August 2016 down to 14% since April 2017). However, a shift of both expected and actual inflation into the range between 5% and 9% may be interpreted as there being room for further reductions.

Figure 3. Classification of monetary environment stance in Belarus, probability estimates

Note: Classification and the methodology for estimates are based on Kruk (2016a). ‘Normal’ regime is characterized by reasonable and relatively stable real interest rates; ‘subnormal’ – too high real interest rate due to ‘inflation expectations premium’; ‘abnormal’ extremely volatile and mainly huge negative real interest rates due to the swings of actual inflation.

Therefore, as of today, one may argue that the long-expected time for a softening of the monetary policy has come, as the ‘expectations overhang’ has disappeared. However, such a view might be too optimistic. Kruk (2017) argues that the convergence of expected and actual inflation rates might be a temporary lucky combination, as there is a lack of evidence supporting a growing credibility of monetary policy among the general public. On the contrary, inflation expectations seem to have shrunk due to a depressed domestic demand and lower consumer confidence. So, even if expectations have contracted, they have not been anchored. Hence, ‘the expectations overhang’ may resurge at any time.

Monetary softening cannot neutralize structural recession

Even if we assume that the ‘expectations overhang’ has disappeared, it would still not mean that there is room for a new monetary stimuli. A naive story about high real interest rates that cause recession glitches once again when interpreting this linkage. Most frequently, countries face a cyclical recession (i.e. caused by temporary demand fluctuations). If that is the case, a negative impact of excessively high interest rates on output path is taken for granted.

However, the Belarusian story of recession is different. Kruk and Bornukova (2014) have shown that the country faced a negative TFP shock, which determined the weakening of the long-term growth rate. Kruk (2016b) shows that due to this shock, the long-term growth rate crossed the zero level approximately at the turn of 2014—2015, and dipped into a negative range later on. Hence, the Belarusian recession that started in 2015 was a combination of a negative contribution from both the long-term dynamics and the business cycle. Furthermore, since the second half of 2016, the negative contribution of the business cycle has faded out, and the recession was determined by the negative TFP shock almost solely (Kruk, 2017) so that, by 2017, the recession has become a purely structural phenomena.

From a monetary policy stance, this gives rise to a new challenge. Although the majority of methodologies still assess the output gap to be negative (but not far away from zero), the output gap will soon be closed automatically because of continuing negative TFP shocks (Kruk, 2017). In a sense, the negative TFP shock contributes to the closing of the output gap in the same way as monetary policy does. However, it does this job in an opposite manner (i.e. by squeezing the trend growth, and not by stimulating the business cycle), it leaves almost no room for monetary policy. It creates a situation where a reasonable loosening of the monetary policy may immediately turn into an excessive one. Taking into account that the dormant inflation expectations can resurge, monetary policy decisions resembles walking on the edge.


Today’s policy discussion in Belarus is extensively concentrated around the search for the best monetary policy to fight the recession. However, this formulation of the problem is a mistake in itself. Today’s contradictions in monetary policy are simply a reflection of the bulk of accumulated structural weaknesses in the economy. Today, monetary policy can hardly do anything to stabilize output. The solutions for ending the recession, and enhancing growth should be found in structural policies, not in the sphere of monetary policy. As for monetary policy, it can, at this moment, hardly contribute to output stabilization (without challenging price stability). To do so, it has to ensure an anchoring of the inflation expectations first.


  • Kruk, D. (2017). Monetary Policy and Financial Stability in Belarus: Current Stance, Challenges, and Perspectives (in Russian), BEROC Policy Paper Series, PP No.43.
  • Kruk, D. (2016a). SVAR Approach for Extracting Inflation Expectations Given Severe Mnonetary Shocks: Evidence from Belarus, BEROC Working Paper Series, WP No. 39
  • Kruk, D. (2016b). The Reasons and Characteristics of Recessiion in Belarus: the Role of Structural Factors (in Russian), BEROC Policy Paper Series, PP No. 42.
  • Kruk, D., Bornukova,K. (2014). Belarusian Economic Growth Decomposition, BEROC Working Paper Series, WP no. 24.