The National Bank of the Republic of Belarus (NBRB) raised its refinancing rate by 75 basis points to 8.50 percent, its first rate hike since January 2015 that comes after the bank's board last month tightened its control over liquidity and the expansion of its monetary base to limit inflation.
In addition to the refi rate, the central bank also raised the overnight loan rate to 9.5 percent and the overnight deposit rate to 7.50 percent.
Belarus has a history of rampant inflation which hit an annual 110 percent in January 2012 when the central bank's refi rate was 45 percent. From that level, inflation declined and in February 2012 the central bank began lowering its refi rate and cut it more than in half by August 2014.
After an uptick in inflation in 2015, NBRB reversed course and raised its rate but then returned to the easing path in April 2016 as inflation continued its steady decline.
But after widespread protests broke out following the re-election of Alexander Lukashenko, who has ruled the former Soviet republic since 1994, the ruble again fell and has remained weak since then as demand for fresh elections continue and neither the United States nor the European Union have recognized Lukashenko as the country's legitimate leader.
Today the ruble was trading at 2.61 to the U.S. dollar, down 0.8 percent this year and while it is up 2.7 percent since a record low of 2.68 in early September 2020, it is still almost 20 percent below its level at the start of 2020.
"From April 21, 2021, the refinancing rate will be 8.5 percent per annum, the overnight loan rate - 9.5 percent per annum, the overnight deposit rate - 7.5 percent per annum.
The relevant decisions were made by the Board of the National Bank of the Republic of Belarus following the meeting on monetary policy on April 14, 2021, taking into account a set of external and internal factors affecting the current and future dynamics of consumer prices.
At the end of 2020, inflationary processes accelerated, which was due to the transfer of the depreciation of the Belarusian ruble to prices, as well as supply shocks in the markets of certain food products.
In early 2021, inflation continued to accelerate under the influence of further increases in world food prices, as well as for imported non-food products, the cost of which to the consumer increased due to increased logistics costs and supply disruptions due to the pandemic.
An additional pro-inflationary influence on the domestic market of Belarus was formed in connection with the cancellation of benefits for value added tax.
These factors, against the backdrop of accelerating inflation and its prolonged deviation from the 5 percent level, led to an increase in inflation expectations, which is confirmed by the results of a survey of the population and monitoring of enterprises. As a result, the list of goods and services of the consumer basket expanded, the prices of which began to grow at a faster pace. At the end of March 2021, the increase in consumer prices amounted to 8.5 percent in annual terms.
In order to limit inflation, the National Bank, within the framework of the monetary targeting regime, adopted a set of measures aimed at strengthening control over the money supply.
An increased inflationary background is expected in the global economy in the near future, which is due to the implementation of a stimulating monetary policy by a number of developed countries. Inflation is also expected to be high in the countries - the main trade partners of Belarus. Thus, according to forecasts of the Bank of Russia, the growth of consumer prices in the Russian Federation will slow down to target targets no earlier than the first half of 2022.
At the same time, the impact on inflation in Belarus of food price shocks, as well as the consequences of the pandemic in terms of an increase in the cost of imported non-food products, may be more significant.
Taken together, these factors form the preconditions for maintaining high inflationary expectations of economic agents for a long time, which increases the risks of continued high inflation in the future.
At the same time, weak consumer and investment demand within the country will somewhat limit inflation.
In these conditions, in order to limit pro-inflationary risks and strengthen measures in the area of control over the money supply, the Board of the National Bank made a decision to increase the refinancing rate by 75 basis points.
Taking into account the influence of all factors, starting from the second quarter of 2021, a decrease in the quarterly growth rates of consumer prices is predicted. At the same time, the earlier acceleration will be reflected in annual inflation until the end of this year. It is expected that the annual rate of price growth will increase in the II quarter compared with the current value and then decline by the end of this year. In December 2021, the increase in consumer prices is estimated at about 7 percent.
In the future, annual inflation will continue to slow down, and from the second quarter of 2022 it is estimated at the level of the medium-term target - close to 5 percent.
When considering monetary policy issues, the Board of the National Bank will continue to proceed from the need to maintain price stability. The decisions made will be based on a comprehensive analysis of external and internal factors, taking into account the duration of their influence and possible secondary effects, as well as on the assessment of inflationary risks."
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