National Bank seeks for optimal scheme to reduce the discount rate
National Bank Chairman Nadezhda Ermakova stated the discount rate could be further reduced in April.
In March 2013 the inflation dropped to 1.1% due to government’s pricing policy, enabling the National Bank reducing the discount rate. Industry insists on discount rate’s sharp reduction, which, however could reverse the situation in the foreign exchange market and increase pressure on international reserves. If negative trends progress, the National Bank may resume to increasing the discount rate.
In March inflation was reduced to 1.1%. The government has slowed down with increasing utilities costs and transport tariffs by putting it off until later. The inflation rate is a key factor to justify further discount rate cuts. Inflation data for Q1 2013 allows for discount rate reduction to 25% pa and at the same time for preserving positive interest rates on loans in the economy.
The rapid reduction of the discount rate carries considerable risks for the fulfillment of parameters laying the scope of the National Bank’s responsibility.
Banks’ resources are largely formed by individual deposits in national and foreign currency. In February 2013 BYR term deposits in the banking system were growing at record pace. Interest rates on national currency deposits in many banks are floating and tied to the discount rate. Interest rate reduction will result in lower profits from deposits and in an outflow of funds in national currency from the banking system or in deposits conversion in foreign currency. In turn, this will result in a change in the foreign exchange market in Belarus, which in February and March was formed by foreign currency net supply from individuals. Currency conversion was a major source of ruble deposits’ growth.
The second threat is the potential rapid growth of the banking system’s loan portfolio if loans rates decrease significantly. Liquidity excess in the banking system can be absorbed by the economy, and the outflow of ruble resources will reduce the lending opportunities. The rapid growth of borrowing by companies, in turn, could trigger inflation. In these circumstances, finding a balance between the desires of industrial sector and aspirations of the major contributors to the ruble resource base is quite a challenge.
Thus, the National Bank will reduce the discount rate in April, but the reduction will be insignificant (within 1.5-2 percentage points). In the future the discount rate could be increased again if imbalances in the foreign exchange market start developing rapidly.
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.