Monetary policy: discount and interest rates on loans and deposits reduced

Stabilization of the inflation rate and of the national currency allows the authorities to initiate the reduction of the loan rates. However such policy has its restrictions. Government’s desire to fulfill the 5% of the GDP growth plan will inevitably result in money issuing with all its consequences.

The Board of the National Bank decided to reduce the refinancing rate by 2 % to 43% per annum as of 15 February 2012.

The trend of the beginning of February, i.e. a sharp decline in interest rates of interbank loans in Belarusian rubles, continues. For instance, the average rate of interbank loans in Belarusian rubles on February 6 was decreased to 34.7% from 40.7% per annum on February 3 and 51.7% per annum on February 2. Prior to this, there was a steady decline in ruble interbank lending rates: on February 1 to 56.1%, on January 31 to 58.6%, on January 30 to 58.9% per annum.

Slowing down of the inflation, increased supply of foreign currency on the domestic foreign exchange market, steady growth in ruble deposits in banks provide the National Bank with grounds to reduce the discount rate gradually. The reduction of refinancing will reduce the burden on borrowers. Interest rates on ruble deposits for the population offered by banks still provide substantially higher returns than deposits in foreign currency and the projected inflation rate. It allows the National Bank to reduce the currency demand from the population and even to increase its supply (interest rates on currency deposits are 7-8%, while ruble deposits interest rates vary between 50-60%).

Further dynamics of the discount rate will depend on the prevailing situation in the monetary sector and in the economy as a whole. With the strengthening of the positive trends the National Bank plans to continue reducing the discount rate gradually, as well as the general level of interest rates in the economy. At the same time, the discount rate will not be reduced as fast as it was growing in 2011, by 5% each time. Partly because the NBB is reluctant to scare away depositors, who started returning to banks due to high deposit interest rates.

At the same time, on the one hand, falling interest rates on the interbank market are due to the sharp increase in the liquidity of state banks following restoration by the Ministry of Finance of its support within the planned funding of state programmes. On the other hand, the state-owned banks reduce lending activity, which reduces their demand for inter-bank resources.