National Bank risks turning off depositors by supporting real sector

The government has managed to convince the National Bank to boost lending to the economy amid gradually reducing loans’ interest rates. The population has immediately reacted to the lower deposit rates with the national currency withdrawal from deposits. Once again, the banking system might face a liquidity deficit, which could be treated either with money printing or by sharply rising loans’ interest rates.

As of May 19^th, the base rate will be reduced by 1% to 21.5 % per annum.

The National Bank has implemented measures to reduce corporate loans’ interest rates. As of May 19^th, the base rate will be reduced to 21.5% per annum, which is one percent below the current rate. Most banks’ interest rates on corporate loans are tied to the National Banks’ base rate. In addition, the National Bank has decided to reduce the interest rates on standing facilities liquidity support from 28% to 27% per annum. Thus, the National Bank cuts rates on the interbank lending market. According to the National Bank’s decision, the new upper limit for interest rates on corporate loans will be 39.4 % per annum.

When corporate loans’ rates reduce, the deposit interest rates also gradually reduce. The population responds to the decline in deposit interest rates by withdrawing ruble deposits from the banking system. In February 2014, the influx of term deposits was BYR 1 175.8 bln, in March it declined to BYR 850.4 bln, and in April – to BYR 364.2 bln. Given the volume of term deposits and the interest rates on loans, it can be stated there was an outflow of deposits from the banking system in April, because deposits’ capitalization is 2.5%, which is double the volume of rouble deposits’ growth. In fact, the banking system is seeing an outflow of the population’s ruble deposits, which make up a substantial part of the banks’ passive base.

The banking system might see a repetition of the mid-2013 situation, when there was a significant outflow of deposits from the banking system amid a sharp decline in deposits’ interest rates. Low interest rates on loans led to a substantial increase in the volume lending in the economy. The National bank did not have means to support liquidity, therefore the interest rates on the inter-bank loans market went up from 21% to 60% per annum within a month.

Provided, that the National Bank is easing its monetary policy, it may launch money printing in order to support banks’ liquidity. However, such measures will result in greater pressure on the national currency. In the context of the announced, but not received loan from Russia, this may lead to further languishing gold reserves. Alternatively, interest rates on the inter-bank market may go up.

The National Bank has decided to increase the volume of lending to the economy. Excessive credit pumping may lead to a sharp increase in demand for rubles, which only the National Bank has in sufficient quantities. The interest rates on loans for the economy will further depend on the National Bank’s decisions.