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Yield of Deposits Affects Belarusian Ruble

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Yield of Deposits Affects Belarusian Ruble

Buying-up currency will become the most popular method to save money.

There are two important financial events have happened in November: announcement of denomination and deposit changes in banks. Both innovations have no direct impact on the forex market, but they significantly affect the Belarusian ruble rate. They will cause an additional reduction of its rate against other currencies, belrynok.by writes.

The rates on popular deposits are getting too low

Introduction of irrevocable deposits will result in rather significant reduction of rates for a great number of deposits. So, on November 12 first Deputy Chairman of the Board of the National Bank Taras Nadolny stated that the interest rate on irrevocable deposits would be 25-30%, and interest rate on revocable ones would "probably be somewhere in the range of 20-25% per annum. That is, the National Bank expects lower rates on revocable deposits by about 5 percentage points, and it's about one-fifth of the current yield deposits.

Taras Nadolny substantiated his opinion, stated that irrevocable deposit rate would fluctuate in the range of refinance rate and monetary instrument rate. Taking into account liquidity risk, revocable deposit interest rate will be 3-4 points low. Conditions for current deposits are not going to change, but Nadolny mentions that banks may decrease rate in some cases as well.

Whatever objective factors for interest rate decrease on revocable deposits are, it will be quite significant. And since April 2016 short-term deposits will be subject to income tax as well, i.e. the yield is reduced by 13%.

In such circumstances, people's interest in savings may significantly decrease. The National Bank, Taras Nadolny says, is ready for it, but it hopes that the population will prefer "long" deposits in the long run. Some depositors, surely, will act this way. But most of them are likely to prefer short-term and revocable deposits despite their lower yield. The reasons are as follows: high economic insecurity and it's better to have an opportunity to withdraw money sacrificing profitability rather than to stay without funds in tough time.

Therefore, people will prefer short-term revocable deposits. Today these are the most popular deposits in Belarus. Taras Nadolny says that about 80% of deposits in national currency are of up to a year period. Three-month deposits are the most popular. They make up a half of all short-term deposits. There are 60% of up-to-year currency deposits, a part of them has a term over two years.

It is hardly possible that proportions mentioned between short- and long-term deposits are to change significantly in next few months and 1-2 years respectively. And low yield on short-term ruble deposits reduces their attractiveness if compare to currency ones, and some people with ruble deposits will turn them into currency. Someone decides to spend money as soon as possible.

Since November 12 banks offer new deposits, irrevocable ones are among them. What should depositors do?

The National Bank to Print New Money

It will cause reduction of deposits and money supply in the country. However, it happens now. So, according to the National Bank, in October the value of urgent (non-transferable) deposits fell by BYR509.9 billion (7.8%) and on 1 November equalled to BYR28.6 trillion. . In September it was two times high.

In October the amount of transferable deposits of natural persons declined by BYR118.4 billion (8.8%) up to BYR13.9 trillion.

Admittedly, if compare to September currency non-transferable(fixed term) deposits of natural persons in commercial banks slightly (0.4%) increased, but it happened after the same decline in September. In dollar terms the number of these deposits increased by $34.5 million and made up $7839.6 million. In October number of transferable currency deposits of the population, funds on their bank cards, rose by $7.7 million i.e. by 1.5% and equals to %512.9 million.

Thus, ruble and currency deposits decreased in September and October. It is possible that it turns to be a tendency in next months. It is the largest resource for commercial banks.

But it seems like the National Bank does not have much concern about it and it's clear. It can always satisfy their need in money at auctions on liquidity. In the last resort there is the Bank of Development through it the National Bank may support the bank system. Thus, the National Bank's creation of money will replace funds of population. But it will also cause pressure on the Belarusian ruble.

So, everything turns against the national currency. Denomination will not promote stability, although it will affect it to a certain degree, in other words, through an increased concern of the population. Money exchange is a technical procedure, but not all the people understand it and it will cause a certain concern in the market. In such cases people prefer reliable ways to save money such as buying-up currency.

All these factors prove a future increased pressure on the Belarusian ruble. In coming months dollar rate, as well as the cost currency basket, will rise to a greater degree than it would have occurred without financial reforms. However, much depends on kind of deposits of Belarusian banks and on the way banks will function.

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