The Shift of Real Interest Rates in Economy to Be Ambiguous

20 december 2016 | Rossiyskaya Gazeta

In the first quarter the Bank of Russia will assess the impact of the first steps of the new Trump administration on the FOREX market and the ability of the signatories to the agreement to limit oil production to perform their obligations. After that, the Bank of Russia is likely to reduce the key interest rate three times in a row (in Q2, Q3 and Q4) each time by 0.5%, so that by the end of the year it reaches 8.5% while the rate of inflation is expected to be 4% per year by then. In these conditions the shift of real interest rates in the economy is going to be ambiguous. In interview with a “Rossiyskaya Gazeta” correspondent, Analytical Center expert Daniil Nametkin commented on the statements recently made by Bank of Russia chair Elvira Nabiullina regarding the key interest rate.

Daniil Nametkin
Daniil Nametkin
Department for Expert Analytics

Mr. Nametkin believes the competition between banks for quality borrowers has already intensified. The banks are already offering loans to reliable corporate borrowers for long term projects at rates of 11-12%. in 2017 this competition is only going to get tougher while interest rates may be lowered to the key interest rate, the expert prognosticates. At the same time, banks are not particularly keen on offering cheap loans to companies that primarily operate in the domestic market, because the general expectation is that the domestic market is going to take a long time to recover because of the collapse in real household income. It is for this reason that when it comes to consumer loans, most banks classify them as high risk, Mr Nametkin stressed. “It suffices to say that even payroll clients are offered loans at 24-25% a year,” Mr. Nametkin notes. “The situation will only change after real household income in Russia starts to grow again.”

The expert also predicts that people will be moving their deposits to state banks. “People are choosing peace of mind over returns, because currently nobody knows what is going to happen to banks which are not ranked among top-10,” Mr. Nametkin believes. “The largest banks are going to take advantage of this situation and by the end of the year they’re going to be offering 4-6% a year on deposits. The other banks will have no choice but keep the rates at the same level as or even above the key interest rate.”

As for currency exchange rates, the dollar will strengthen against the euro, but that trend has always meant depreciation of the ruble and contraction of the Russian stock market, the expert noted. “Currently, there seems to be zero correlation between the ruble and the dollar, but this state of affairs will not last for long. For example, the speculative growth of non-resident investments in ruble assets has exhausted itself, Russian treasury bills are already delivering lower returns than 10-year-old US treasury securities,” Mr Nametkin noted.

Source: Rossiyskaya Gazeta