Refinancing rate falling, yet without sharp fluctuations

National Bank adopts decision anticipated by many since last December, lowering the refinancing rate
By Valery Rushevsky

The refinancing rate currently stands at 28.5 percent, having dropped from 30 percent (as it stood for six months). The aim is to achieve macroeconomic balance and slow inflation but what else may the year bring in this vein?

Less is more?
The economic collisions of previous years have seriously influenced the dynamics of the refinancing rate in Belarus. For example, in 2008, the average figure stood at a very modest 10.35 percent; it rose to 11.82 percent in 2010 and then reached 21.57 percent in 2011. By early 2011, it had been reduced to 10.5 percent but then shot up to a frightening 45 percent by the end of the year. 

Last year, the National Bank reduced the refinancing rate eight times and achieved 30 percent by September 2012; this year, 15 percent is the target for the Basic Areas of Monetary and Credit Policy.

The country’s commercial banks use the refinancing rate in setting their own interest rates for loans to the private sector; the lower the refinancing rate, the lower the interest rates offered on loans to enterprises, organisations and the general public. If the refinancing rate is low, it’s easier to borrow money from banks and the volume of loans rises. Money is then spent on modernisation and the purchase of raw materials, creating more manufacturing of goods for export. Meanwhile, public access to loans for buying goods and services helps fuel the economy.

“The current reduction in the refinancing rate, by 1.5 percent, will lead to a corresponding drop in rates on Rouble deposits and loans. In fact, interest rates may fall by even more than those for saving accounts. A month ago, the National Bank sent a letter recommending that the margin be kept within 3 percent,” explains financial analyst Vadim Iosub. “The National Bank is keen to avoid the situation seen in September-October 2012, when people transferred money from Rouble deposits into foreign deposits.  Even with a reduction of 1.5 percent, interest rates on Rouble deposits remain far more attractive than those on foreign currency deposits.”

Zero decision
A number of states keep their refinancing rate close to zero: in the USA, the figure is just 0.25 percent; in Japan, it’s 0.1 percent; and the Eurozone keeps it at a modest 0.75 percent. It doesn’t guarantee a healthy economy of course. “If the refinancing rate is zero, the state is offering ‘interest free’ money to economic entities; it tends to be done when enterprises are experiencing real economic difficulties. Nations reduce their refinancing rate to stimulate the economy,” notes financial expert Valery Polkhovsky. “A rate of 3-4 percent is considered to be healthy for the world’s leading economies; it helps the central bank keep inflation at around 2 percent per annum and the refinancing rate is placed slightly higher. This is the ideal situation and what we’d term healthy.”

Searching for a compromise
Last year, Belarus faced the challenge of expanding production and increasing exports of goods, to keep gold-and-currency reserves buoyant and strengthen the national currency. This aroused an acute need for affordable loans for the private sector.

However, the National Bank won’t sharply reduce the refinancing rate, since this would lead to corresponding reduced interest rates on Belarusian Rouble loans and deposits, which could inspire people to place their savings in a foreign currency, creating a negative situation on the currency market.

Trend to continue
On March 13th, the National Bank reduced the refinancing rate by 1.5 percent. “Actually, the situation in February and the forecast for further reduced inflation makes us hope for a gradual reduction in the nominal value of the refinancing rate, while preserving its positive real level,” notes the National Bank.

In February, inflation fell to 1.2 percent (against 3 percent in January). “January inflation was rather high but it may have been due to price rises instigated by the state. These prices rises and, accordingly, inflation were ‘scheduled’,” comments Mr. Polkhovsky.

How will the refinancing rate behave in the months to come? Experts believe that Belarus needs to keep to a strict monetary credit policy, keeping the cost of loans at least 3-5 percent above inflation. “In order to keep the refinancing rate at 13 percent we need to maintain inflation at 8-10 percent. However, definite pricing pressure exists, so it’s not effectual to focus only on this,” explains the analyst.

At the same time, cheaper loans are necessary for the development of the economy, so experts are confident that the trend of reducing the refinancing rate will continue.
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