Wednesday, July 17th 04:18 PM IST

Belarus retains discount rate to maintain Gold reserves level

# National Bank  # Belarus gold reserves  # US Fed  

Until recently, the National Bank was continuously reducing the discount rate, justifying this by reduced inflation rate in Belarus.

MINSK(BullionStreet): Belarus's central bank, the National Bank said it retained the discount rate for July to maintain country's gold reserves level.

According to a statement by the central bank, it chose to sacrifice the discount rate for the sake of maintaining the gold reserves level at $8 billion.

The statement said any reduction in rates would have negatively affect the currency market.

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.

Belarus's 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 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 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 $400 million on external public debt in July, , additional demand for the currency would result in national reserves falling below the $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.

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