National Bank ‘eases’ measures to curb inflation to maintain gold reserves
On July 10th, the National Bank issued a statement that the discount rate would remain unchanged in July 2013.
The National Bank had formal reasons to reduce the discount rate. However, if continued into July, this measure would have negatively affected the currency market. Therefore, the National Bank chose to sacrifice the discount rate for the sake of maintaining the gold reserves level at USD 8 billion.
Until recently, the National Bank was continuously reducing the discount rate, justifying this by reduced inflation rate in Belarus. The reduction was carried out with the aim of preserving positive interest rates in the national currency in the economy. Inflation stood at 0.3% in June, while in the first half of the year it was at 7%, which allowed the National Bank to reduce the discount rate to 15-16% per annum. This level ensures positive rates in the economy (above inflation rate) and will allow discount rates to be reduced to 13-15% by the year’s end.
However, due to the sudden change in the foreign exchange and deposit markets, further reduction of the discount rate in July is not feasible. In June individuals were net foreign currency buyers. A stronger U.S. Dollar in world markets against major currencies at constant values of the NB currency basket has resulted in the Belarusian ruble depreciating against the US Dollar. Belarus’ population pays attention to US Dollar exchange rate fluctuations regardless of the currency basket rate. In light of falling incomes on national currency deposits, depreciation of the ruble against the dollar has resulted in an outflow of deposits from the banking system and a sharp decline in liquidity in the banking system.
The National Bank’s choice was predictable. Discount rate reduction would speed up the outflow of deposits from the banking system, since some of the deposits were at floating interest rate which depended on the discount rate. The population would invest their rubles in cash foreign currency. Bearing in mind the peak payments of over USD 400 million on external public debt in July, , additional demand for the currency would result in national reserves falling below the USD 8 billion margin. The National Bank has chosen to maintain the gold reserves, rather than not meet the discount rate reduction plan. In this way, it expresses its monetary policy priorities.
Regardless of governmental pressure to reduce loan interest rates in the economy, the National Bank was able to convince the country’s leadership that preserving gold reserves was a priority. The National Bank will continue to monitor Belarus’ currency market, adjusting it accordingly and will abandon harsh control over inflation processes.
The Belarusian authorities regard the Catholic conference as yet another international event to promote Minsk as a global negotiating platform. Minsk’s proposal to organise a meeting between the Roman-Catholic Church and the Russian Orthodox Church is rather an image-making undertaking than a serious intention. However, the authorities could somewhat extend the opportunities for the Roman-Catholic Church in Belarus due to developing contacts with the Catholic world.
Minsk is attempting to lay out a mosaic from various international religious, political and sportive events to shape a positive image of Belarus for promoting the Helsinki 2.0 idea.
Belarus’ invitation to the head of the Holy See for a meeting with the Patriarch of the Russian Orthodox Church should be regarded as a continuation of her foreign policy efforts in shaping Minsk’s peacekeeping image and enhancing Belarus’ international weight. The Belarusian authorities are aware that their initiative is unlikely to find supporters among the leadership of the Russian Orthodox Church in Moscow. In Russia, isolationist sentiments prevail.
In addition, for domestic audiences, the authorities make up for the lack of tangible economic growth with demonstrations of growth in Minsk’s authority at international level through providing a platform for religious, sportive and other dialogues.