August 19 – August 25, 2013

The National Bank has made a choice in favor of monetary policy tightening

The situation has not changed
The National Bank has made a choice in favor of monetary policy tightening

On August 13 the decision was made during the meeting of the management board of the National Bank ‘to maintain rigid interest rate policy’ which virtually means the suspension of further refinance rate cuts.

The National Bank virtually gave up its earlier plans to decrease the refinance rate reaching 13-15% this year. The reasons: significant drop in export foreign currency revenue, the lack of sources for new external loans. In such a situation, against the backdrop of growing devaluation expectations, further support of the governmental policy targeted at stimulation of the GDP growth based on large-scale ruble loans, threatens to seriously destabilise the financial market.

The National Bank justified this decision by the need to ‘keep a balanced condition of the financial market and curb inflation’. Besides, as underlined in the official statement by the National Bank, ‘sustaining the high level of profitability of ruble deposits which significantly outstrips profitability of deposits in foreign currency will promote ensuring sustainable growth of ruble savings in banks’.

Just as a reminder, the refinance rate was reduced four times this year, dropping from 30% annual rate in March to the current 23.5% annual rate. The rate was expected to decrease to 13-15% by the end of the year. These plans were adopted under the pressure of the government striving to improve the disastrous statistics of the GDP growth by increasing lending to the industrial sector. Still, growing accessibility of ruble credits has led, as expected, to decreasing interest rates on ruble deposits. Which, in turn, has been translated into a sharp increase of the foreign currency demand both on behalf of companies and natural persons and the outflow of ruble funds from deposit accounts against the backdrop of a new wave of devaluation expectations. As a result, population itself purchased USD 621 mln on net basis in July while ruble deposits decreased by BYR 3.28 trn.

By mid July the banking system faced the substantial shortage of ruble liquidity (about BYR 3 trn), interbank credit rates leaped from 21.7% to 60.9% in the course of two weeks. Large-scale injections of ruble liquidity in the form of lombard credits and bilateral swap-transactions allowed the National Bank to curtail panic in the market. Dropping inter-bank credit rates reached 21-25% by early August, and as a result commercial banks had to artificially boost deposit rates up to 35-38%.

Thus, the National Bank actually abandoned earlier declared plans to decrease the refinance rates to 13-15% in 2013. The reasons: long-lasting foreign trade problems which brought about significant reduction in export foreign currency revenue, the growth of devaluation expectations, absence of sources for new foreign borrowings. In such a situation further support for the governmental policy aimed at stimulating the GDP growth by way of large-scale ruble credits might lead to catastrophic destabilisation of the financial market.

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Once a week, in coordination with a group of prominent Belarusian analysts, we provide analytical commentaries on the most topical and relevant issues, including the behind-the-scenes processes occurring in Belarus. These commentaries are available in Belarusian, Russian, and English.

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