Financial market recovery slows in June
In early June, financial markets in most countries continued the upward trend amid a progressive economic recovery. However, the second ten days of the month induced pessimism in markets due to concerns about a potential resurgence of the coronavirus in the USA and a growing number of active cases in emerging market economies. These are the findings given in the new issue of the Banking Sector Liquidity and Financial Markets commentary.
In June, the structural liquidity surplus decreased. One of the reasons behind this was that banks were delaying their required reserves averaging, expecting the Bank of Russia to cut the key rate at the June meeting of the Board of Directors. Overall, the improving trends of liquidity factors supported the inflow of funds to banks.
The spread between interbank lending rates and the Bank of Russia key rate expanded as market participants expected a key rate reduction in June. The interest rate spread in the FX swap and interbank lending segments turned negative. The cost of foreign currency liquidity went up, pushed by a decrease in foreign currency supply by individual banks.
Market participants’ expectations regarding the key rate continued to lower in June. Therefore, the key rate reduction by 100 bp was foreseeable by the majority of market participants and caused no volatility in the market.