Economic lending frozen pending further reduction of loan interest rates

In May and June, the National Bank continued easing the monetary policy. Its sustained actions to reduce corporate loans rates have led to lending being suspended in anticipation of even lower rates. Currently, the rates remain high, but when they drop to 25% per annum, a rapid growth in rouble loans might occur, leading to liquidity shortages.

According to the National Bank, May 2014 saw the increase in lending to the economy at its lowest in the past year and a half.

In June, the National Bank continued to gradually reduce corporate loan interest rates. The rate for permanently available liquidity support operations was reduced to 26% per annum. As of June 14^th, the size limit for interest rates on loans was set to 37.3% per annum. Auctions for placing banks’ available funds have been successful and the excess liquidity is more than BYR 1.5 billion. State enterprises are constantly provided with preferential loans under governmental programmes or receive partial rate-compensations on previous loans.

In these conditions, urgent situations apart, enterprises prefer not to raise any loans. They repay previously taken short-term expensive loans in anticipation of new, lower interest rates.

Not considering the preferential lending for housing construction, in May, corporate debt increased by less than BYR 500 billion or 0.3% of the total ruble debt in the economy, perhaps implying that enterprises have partially repaid their debt.

For most businesses, taking the economic situation into account, rates above 30% per annum are almost prohibitive. However, if rates drop to the level of 25-27% per annum, enterprises may resume lending, and the pent-up demand for loans may lead to a rapid increase in lending to the economy.

The excess liquidity in the banking system is insignificant and may be absorbed by the economy’s real sector in less than a month. During the summer, the state banks may use up some funds in order to finance a substantial amount of public investment programmes. With the current rates (35% per annum) rouble deposits are shrinking, and if the rates continue declining to the level of 25% per annum, the outflow of roubles from the banks might rise to BYR 1-1.5 trillion per month. All these factors create favourable conditions for the new liquidity crisis.

Belarus’ economy is anticipating further reduction in loan interest rates, meanwhile resorting to loans only when necessary. Belarus has received a USD 2 billion loan from Russia. This means that she can increase economic lending, including partially through money printing.