Restoring stability of exchange rate fluctuations

The National Bank to intervene only for smoothing the peak values

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Exchange reserves will be protected, exchange rate will be attached to the basket of currencies, and refinancing rate has already been raised to 25% – the National Bank has announced new measures of monetary policy. Three weeks after a bomb, which ripped on the country’s financial market in the form of the National Bank’s press release “On solutions of the government and the National Bank to prevent the development of negative trends on financial market” from December 19, 2014, a regulator “has bombed” with another press release “On measures of monetary policy to stabilize the situation in financial sector” on January 8, already 2015.

Analysis of the names of two documents (due to lack of officials’ statements) leads to the conclusion that negative trends haven’t been managed to overcome yet, so “stabilization of the situation in financial sphere and restoring stability of functioning of currency market” get needed – exactly these purposes of announced measures are specified in a new press release, which, as well as at the first time, was released almost without references to specific solutions and resolutions of the National Bank.

Unification of exchange rate
The first unit in the complex of announced by the National Bank measures connected with liquidation of the introduced exchange fees and taxes from December 19.
“Considering zeroing of the tax on exchange operations of foreign currency purchases from January 8 (the resolution of the Council of Ministers from January 6, 2015 №5) the National Bank’s management decided to cancel a commission fee when buying foreign currency for individuals” said the report.

It’s noteworthy that during these three weeks of the existence of the tax-fee most of people did not understand why they were twain. Inasmuch as a fee on purchasing of foreign currency was named “a tax” by the National Bank’s representatives, it seemed at first that everyone paid it: individuals, buying currency at exchange offices, and juridical entities, buying currency at exchanges. But a presidential decree, which was released on a foreign exchange tax, limited its scope only by exchange operations. That is to say the government didn’t dare to impose a tax of individuals, probably having considered it as juridical voluntarism. However, this measure was introduced in order to bring down the excessive demand from individuals, so for them a selling rate had also been raised by 30%, but the National Bank named it “a fee”, charged by banks.

Accordingly, reduction and cancellation of the tax-fee passed in two stages. First, the Council of Ministers took a decision on basis of the presidential decree on the tax, and then the National Bank did the same thing concerning the fee.

Despite the fact that the tax was cancelled by the Council of Ministers, exactly the National Bank, which liquidated the fee one day later, pointed out at reasons of what had happened. “This measure is intended to unify exchange rates of buying and selling in various segments of foreign exchange market, including exchange offices of banks and bring them closer to official exchange rate of Belarusian ruble,” – said the National Bank’s report.

Thus, the National Bank acknowledged that as a result of introduction of the fee the country lived for three weeks in a situation of multiplicity of exchange rates.

Returning to the basket
The second and perhaps the most important unit of questions in terms of further development of the situation is voiced by the National Bank as formation mechanism of exchange rates.
So the National Bank has reported about resumption of using the mechanism of attachment Belarusian ruble to the basket of foreign currencies from January 9, 2015. At the same time in structure of the basket a share of Russian ruble is increased to 40%, while shares of euro and US dollar are decreased to 30% each one.

Recall that before the shares of these three currencies in the basket were equal before. Three-currency basket was introduced in 2009 after the first devaluation, which had occurred on January 2 and had been 20%. However, it didn’t have a serious economic effect, because at that time exchange rate of Russian ruble was gradually going on decreasing and our exporters were still incurring losses.

In the end of January 2009 the government and the National Bank gathered a press conference where they told about how economics would carry on working. It’s interesting that 6 years ago current Prime Minister Andrei Kobyakov and current Head of The National Bank Pavel Kallaur attended that press conference, but they held other positions. At that time Andrei Kobyakov talked about three-currency basket, which, according to him, would enable to protect Belarusian ruble from other currencies’ jumps, that is, to help “not to run for Russian ruble” as we say now with a light hand of ex-Head of the National Bank Nadezhda Ermakova.

On January 1, 2009 three-currency basket “weighed” 960 BYR, on December 18, 2014 it put on to 2.888,54 BYR, which corresponded to triple devaluation of Belarusian ruble to the basket for less than 6 years. On December 31, 2014 the basket already cost 3.318,7 BYR, that is, after introduction of the first the National Bank’s measures Belarusian ruble became cheaper on almost 15%.

After introduction of new order of “basket’s formation”, i.e. increasing a share of Russian ruble and decreasing shares of US dollar and euro, from January 1, 2015 a cost of the basket was already recounted under new rules. On January 1 there was a rate to the basket on the level of 2.495,18 BYR in the National Bank’s data. On January 9 the basket was already 2.770,25 BYR and, according to the National Bank, as compared to December 31, 2014 Belarusian ruble depreciated by 9.78% to the basket. For the same time US dollar became stronger to Belarusian ruble by 16.12%, euro – by 12.93%, Russian ruble – by 3.03%.

That’s the way how “jumps” of particular exchange rates of the basket are going to be leveled.

Interventions for smoothing
As for movement of exchange rate to the basket, “within the framework of a new mechanism the approaches of using of exchange reserves are tightened for supporting exchange rate” said in the National Bank’s press release.

The National Bank said that “currency interventions will be carried out only for smoothing peak value fluctuations of currency basket in volumes, which ensure a positive balance of buying and selling foreign currency by the National Bank per medium term. Fluctuations of Belarusian ruble towards each of currencies (US dollar, euro and Russian ruble) will be formed by changing the value of the basket under influence of demand and supply of foreign currency during exchange trading, and by reciprocal changing of cross-rates of foreign currencies. In this case, exchange rate can change as in one as in the other side.

At the same time the National Bank finds that “introduction of the rate fixing mechanism will enable to control more effectively exchange rate of national currency to foreign currencies, which matter for foreign economic activity, and improve stability of Belarusian economy to external factors”.

Note that before the National Bank also declared free rate fixing with smoothing peaks, although practically it turned into gradual and slow devaluation in hard-coded corridor, namely plus 10 BYR for trading. So in fact, much will depend on manual exchange rate control and the National Bank’s interaction with particular individual banks.
In principle, the National Bank itself did not rule out the fact that measures of economic, fiscal and monetary policy will be used in order to maintain comparative stability of exchange rate of Belarusian ruble.

That is, a request for comparative stability of exchange rate has already been done, but the way, how it is going to be achieved without interventions, is still difficult to comprehend from the press release.

Interest rates will be getting closer to each other
In addition, the National Bank took a number of decisions in the area of interest rate policy, which are aimed at forming the exchange rate level in economy, that ensures financial and macroeconomic stability, deceleration of inflation, and the balance of interests of depositors and borrowers, the report said and then lists the specific measures. So, from January 9, 2015 a refinancing rate increased by 5 percentage points to 25%. Since January 14, interest rates on constantly available and bilateral operations of banks’ liquidity support decreased from 50 to 40% per annum, a rate on overnight deposits increased to 20% per annum. In this case, since January 9, the upper limit of interest rates on deposits of juridical entities decreased from 50 to 40% per annum.

The upper limit on ruble deposits of individuals are still retained at 50%, but as the situation is stabilizing, these rates will also decrease, the report said. In addition, the National Bank to maintain liquidity of banks reduces required reserve’s norm of borrowed funds in foreign currency: in January – from 13 to 12.5% in February – up to 10%. The National Bank said that this measure will enable stable work of banks in terms of lack of ruble funds, formed in December 2014.

Without any forecasts
Most of people regarded these measures as the National Bank’s rejection of interventions for supporting of exchange rate, and it would provide “free floating” of Belarusian ruble, which is now going to follow changes of Russian ruble increasingly. In this connection, experts make disappointing forecasts about exchange rate, because in the near future Belarusian rubles, which were introduced in the end of December on 50% per annum for a month, because of the looming prospect of decreasing rates and more flexible rate fixing in front of depositors, may be withdrawn from the deposits and gush into currency market again. Therefore, everything depends on what steps will be undertaken in the future. Now all announced measures are only correcting others, adopted in December 2014.

One thing is clear: all parameters and forecasts, which approved in 2015, have ordered to live long. So this year we will go on not from forecasts, but from “life.” However, as this is our usual thing, no one will cancel presidential decrees on forecasts, so that reference points of GDP, inflation and exports will resurface more than once at different meetings as threat of dismissal for newly appointed officials.