Devaluation of the Belarusian rouble will prompt National Bank to abandon plans to reduce interest rates on loans

April 22, 2016 19:24

The sharp decline in banks’ liquidity has prompted the National Bank to provide support to banks. Amid significant adjustments in the national currency exchange rate, the population and legal entities have dramatically increased the demand for loans in the national currency. The National Bank has waived the requirement to reduce interest rates on loans until the liquidity situation in the banking system stabilises. 

On August 26th, the National Bank held the first since May 2015 auction for liquidity support. Following the auction, the National Bank has decided to provide BYR 3 billion support to the banking system at weighted average rate of 30.11% per annum. As a result of the national currency adjustment against the Euro, since early August BYR depreciated from BYR 16 678 / EUR 1 up to BYR 19,789 / EUR 1 or by 18.7%, which has led to a sharp increase in the interest rates on the interbank market from 18-20% per annum to 30 % per annum. 

As BYR weakened against US Dollar and Euro, the population and legal entities have resorted to a familiar tactic of the sharp increase in demand for rouble loans, hoping for their further depreciation. The population has increased demand for consumer loans to purchase commodities amid strict price control by the Trade Ministry. Legal entities have been actively taking loans in order to convert them into foreign currency, hence, a sharp increase in the trading volume on the foreign exchange market. People started closing their rouble deposits, which has led to problems with the availability of foreign currency in exchange offices and deteriorated banks’ liquidity. 

In the given circumstances, it made no economic sense for the banks to continue following the National Bank’s recommendations to limit the loan rates by the level of interest rate on overnight loans. The banking system liquidity has sharply declined. Some banks restricted lending. In the current circumstances, the population will not increase the volume of rouble deposits, which means that banks have lost the opportunity to issue cheap loans. As of September 1st, the restrictions on loan interest rates may also be applicable to contracts concluded before June 1st, 2015. 

Amid the sharp demand for roubles, the National Bank may abandon sanctions against banks, which have not revised their interest rate policy; lift or suspend restrictions on interest rates on loans; increase interest rates on new loans up to 40-45% until the foreign exchange market stabilises and demand for roubles reduces. In addition, in order to raise the resource base deposit interest rates may exceed 30% per annum. 

The National Bank’s plans to reduce interest rates in the banking system have changed after a significant weakening of the national currency. In order to stabilize the situation, the National Bank will provide liquidity support to banks, but the interest rates on loans will increase in order to reduce speculative demand for resources from the population and legal entities.