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Economist: The National Bank Was Essentially Deprived Of the Steering Wheel

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Economist: The National Bank Was Essentially Deprived Of the Steering Wheel
Photo: bymedia.net

There is a threat of a serious acceleration of inflation.

Tut.by together with economist Dzmitry Kruk discussed the refinancing rate in Belarus.

Recently, Belarus discussed the refinancing rate, or rather the fact that it remained at the same level - 7.75%. Why is this indicator so important, and the news itself has become so resonant?

- Let's start with the fact that the refinancing rate (in other countries, it can also be called, for example, the “key rate”) is the percentage at which the central bank lends to commercial banks, that is, in this way it lets money into the economy, - explains Dzmitry. - Based on the value of this rate, banks estimate how much loans should cost and what should be the yield on deposits. Thus, the central bank, through the refinancing rate, can influence the behavior of banks (make their loans and deposits more affordable or, conversely, more expensive), and through the behavior of banks - on the behavior of firms and households. Thus, for ordinary citizens, the refinancing rate, even if it does not directly affect, but through one or two "handshakes," strongly affects our life.

Dzmitry Kruk emphasizes that the majority of specialists in the economy for the past 30-40 years are in solidarity in the assertion that the refinancing rate is the most important, most powerful, and most effective instrument of the current economic policy of the state.

When determining the value of their rate, the central banks of states are primarily guided by the natural level of interest rates for their economies. This is a kind of benchmark, the value of which is determined by several "genetic" characteristics of the economy: for example, the ability to generate growth, the rate of population growth, and so on.

- When deciding to change the rate, the central bank can take two paths: stimulate the economy or limit economic activity, - the expert says. - For this, the rate must be lower or higher than the reference value. For Belarus, in real terms in recent years, this value was estimated at about 3.5% per annum, and in nominal terms, that is, adjusted for inflation, the benchmark for the neutral rate is 8.5-9%. If the central bank is tasked with stimulating the economy, it sets the rate below the benchmark. In this case, commercial banks will also be ready to issue loans to companies and people at a lower rate. More firms will be able to take out loans for their projects, and banks, in turn, will issue more loans and request more money from the central bank. If the rate is higher than the benchmark value, the implementation of projects becomes less profitable, firms borrow less, and commercial banks ask the central bank for less money.

Summing up, Dzmitry explains the essence of managing the refinancing rate: setting it above or below the benchmark, coordinating the value with the current goals and objectives of economic policy. For example, if we want to slow down inflation, we must squeeze business activity, and we can achieve this by setting the refinancing rate higher than the benchmark. If we see a decrease in business activity, and inflation fades into the background, the rate can be lowered relative to the reference value and thereby "spur" business.

A logical question arises: what is the point of leaving the refinancing rate at the same level without raising or lowering it? What processes in the economy can this indicate?

According to Dzmitry Kruk, in the case of Belarus, the logic of comparison with the “reference value” is now little applicable. If it was followed, the rate had to be raised: both inflationary expectations and inflation itself had increased markedly. But the rate was left the same - probably based on considerations outside the traditional central bank logic of managing inflation and business activity. The National Bank takes into account the interests of state-owned enterprises because the refinancing rate often affects the rates on previously issued loans. If it is increased now, it will become more difficult for Belarusian enterprises to service old loans, which have accumulated a lot. This is the main factor why the rate was left unchanged.

What negative consequences can such a decision have? According to the economist, one of the main threats is inflation acceleration. To avoid this, the National Bank switched to an archaic mechanism for refinancing banks. They usually decide for themselves how much money to borrow from the central bank at a given interest rate, based on the demand for their loans. Now the refinancing rate is low, and banks would like to get more money. But the National Bank actually manually determines to whom and how much money it is ready to give at its own rate. Such a refinancing mechanism was actively used in the world in the 1970s and did not work well.

- In fact, it’s as if the steering wheel was taken away from you in the car, and some kind of pole was given into your hands, with which you can jerk the wheels: there is no normal mechanism, so you have to invent some improvised tools, - Dzmitry draws parallels.

In developed economies, rate management is the exclusive prerogative of the central bank, he said. This is the most powerful instrument of the current influence on the economy, therefore, the central bank must be independent in its decision. After all, it is easy to destabilize the economic situation and accelerate inflation, but it is much more difficult to normalize it. Therefore, the Central Bank usually has the exclusive right to regulate the refinancing rate and bears exclusive responsibility for this. In the case of Belarus, the decision of the National Bank was probably not completely independent.

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