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.
President Lukashenka has met with the head of Chechnya Ramzan Kadyrov, who visited Minsk and the Minsk Automobile Plant. Minsk has always sought to have independent links with Russian regional elites, partially, to compensate for the Kremlin's diminishing interest in Belarus. In recent years, Belarus’ contacts with the Russian regions have been extremely intense. However, with some leaders of Russian regions, primarily heads of large republics, communication was more difficult to build. As many analysts in Minsk suggested, Minsk could regard contacts between President Lukashenka and the head of Chechnya as an additional communication channel for relieving tension in relations with the Kremlin. However, most likely, a trusting relationship with Kadyrov is a value for Minsk as such, provided Kadyrov’s broad business and political interests, and a high degree of autonomy for the Chechen leader from the Kremlin.