Population hampers National Bank’s plan to reduce discount rate
In mid-August the interbank loans rates returned to 37-39% per annum.
In July 2013 the National Bank received a clear message from the population about what interest rates on national currency deposits they would consider acceptable and below which they would react with withdrawal of deposits. The minimum acceptable deposit rates are significantly higher than the discount rate projected for the year-end. This implies that the National Bank will be unable to provide low-cost loans to the economy by the year-end, and that the industry will be held responsible for the failure.
The broad money supply data and foreign exchange market situation in July 2013 provide a clear understanding of the acceptable interest rates on national currency deposits for the population. When the discount rate dropped to 23.5% per annum against the forced depreciation of the national currency in July, there was a sharp outflow (about 7% as of early July) in term ruble deposits by the population from the banking system. The main marker for the Belarusian population is the interest rate at 25% per annum, if lower, a sharp outflow of ruble deposits and their partial translation into foreign currency deposits instantly follows.
The National Bank’s rapid response - raising deposit market interest rates - somewhat leveled the situation, but at the same time, raised the expectations of national currency deposits holders, who now consider rates at 30%+ per year as the minimum acceptable in view of the increased risks of national currency depreciation. According to the monetary policy basic guidelines for 2013, the discount rate by the year-end has to fall down to 13-15% per annum. The National Bank is no longer able to implement its step-by-step strategy to reduce the discount rate due to sharp negative reaction by the population and the need to weaken the BYR exchange rate.
The international reserves are lower than the critical USD 8 bln. Moreover, current real value of the gold reserves has been retouched with USD 350 million upwards using short-term loans from non-residents. Due to the lack of guaranteed international funding and the country’s leaders’ reluctance to privatize the state property, the only way out for the National Bank is to maintain high interest rates on deposits, (unofficially at circa 35% per annum) and to smoothly weaken the Belarusian ruble against the US Dollar at circa 1% per month. This allows to ease the pressure on the international reserves and to reduce their dwindling pace.
Since the discount rate cannot be reduced further, the government’s plans to reduce the loans’ costs for the economy fail too. However, it does not carry negative consequences for the NB management, since the main reason behind the situation is the industry’s failure to fulfill export growth plans. Shortfall in foreign exchange earnings due to falling exports enables the National Bank to maintain harsh monetary policy, i.e. to keep high interest rates on loans in the economy. It is worth mentioning that the National Bank is not under pressure anymore to reduce the loans’ costs. Macroeconomic stability has been given the priority, and low-cost loans by the year-end should not be anticipated.
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.