Interbank market is back to volatile stability

The National Bank managed to stabilize the interbank situation with ruble loans after a sudden increase in rates in late July up to 60.8% per annum.

Tactical tightening of monetary policy by the National Bank was implemented along with creating an artificial ruble liquidity shortage, which resulted in higher interest rates on ruble deposits in the banking system. The National Bank pursued to stop the mass conversion of ruble deposits in currency deposits in order to ease the pressure on the BYR exchange rate. However, the main destabilizing factors relate to the devaluation expectations by the population, and might increase again by the mid-September, when the situation in the financial market deteriorates once again.

On July 31^st, the average rate on overnight interbank loans in Belarusian rubles decreased from 40% to 37.5% per annum, due to the National Bank measures to support the banking system liquidity. On July 31^st, and August 1^st, the National Bank has provided liquidity (mainly to large state-owned banks) up to BYR 3.6 trillion. As of August 1^st, lack of liquidity in the banking system was circa BYR 615 billion.

However, the achieved stability in the interbank market remains volatile and interest rates will not be reduced (on July 1^st were 21.7% per annum).

The abrupt increase in interest rates on overnight loans (on July 24^th, the average rate reached 60.8%) was caused by ruble liquidity shortage, accumulated by mid-July. Commercial bank’s increased demand for BYR in this period is explained by their need to form the NB’s reserve requirements, as well as by the quarterly VAT payments due by businesses. Population and businesses’ devaluation expectations – reflected in a sharp increase in currency demand – was yet another destabilizing factor (including outflow from ruble to currency deposits). Deposit rates for private persons dropped from 40-46% in early 2013 to 22-26% in mid-June. Accordingly, investment in foreign currency is perceived as more attractive. All in all, the banking system is expected to raise deposit rates to 35-38% next month.

Thus, the interbank loans market was pumped with national currency in order to overcome the ‘peaking’ liquidity shortage, but the measure did not solve the main problem, i.e devaluation expectations. Besides, the rates’ burst on the interbank market could also be a consequence of tighter monetary policy implemented by the National Bank aiming at increasing deposit rates by creating an artificial ruble liquidity ‘shortage’. The NB wanted to suspend the mass conversion of ruble deposits into currency deposits to ease the pressure on the BYR exchange rate. However, by mid-September the financial market situation might deteriorate once again.