National Bank detected cheap resources shortage in the banking system

On July 1^st, interest rates on standing facilities designed to withdraw liquidity increased up to 20% per annum.

Discount rate’s reduction resulted in slower growth rate of banks’ ruble resource base amid growing demand for rubles. In these circumstances liquidity shortage risks increased in a number of banks. To overcome this situation, the National Bank narrowed the margins for exchange rate corridor by raising the minimum acceptable interest rates level for loans in national currency.

Discount rate’s reduction during 2013, as anticipated, resulted in gradual decline in the attractiveness of national currency deposits and slower growth rate for ruble deposits in the Belarus’ banking system. In May 2013 term ruble deposits increased by BYR 807 billion, which is the lowest in 2013. Lending in local currency as loans rates were lowered was rising gradually and in May outstanding loans in national currency reached BYR 2 677.8 billion.

In the banking system, assets growth (credits in national currency) outpaced liabilities growth, which is formed by liquid assets in various economic sectors. Potentially, liquidity shortage might occur, entailing an increased rates in the interbank market and suspension of business loans. Some banks introduced measures to prevent this situation. They have introduced new deposit products, increased fixed long-term deposit rates and the discount rate award on deposits with floating interest rate.

On June 28^th, the National Bank increased interest rates on standing facilities to withdraw liquidity from 17% to 20% per annum. Simultaneously, it reduced rate on standing facilities to support liquidity from 38% pa to 35% pa. This measure was designed to solve the following problem. The liquidity withdrawal rate establishes a minimum interest rates level in the interbank market and forms the lower margin for loans in the real sector excluding government subsidies. The rate’s growth will reduce activity in the local currency lending and will make banks to examine their counterpart’s financial conditions more closely. Reduced rates on liquidity support operations lower the rate’s upper limit on the interbank market when some banks face a resources shortage. The National Bank acts to forestall the situation and signals the government that very cheap credit resources might become unavailable for businesses in the near future.

Thus, the government’s desire to speed up lending to the economy encountered the anticipated response from the National Bank – the latter does not want to accelerate lending to the economy, as it will result in sharply elevated pressure on the National Bank’s international reserves, and might damage the growth in economy’s credits indicator.