Comments of the Board of the National Bank to the Decision to Maintain the Refinance Rate at the Current Level
On December 19, 2018, the Board of the National Bank took a decision to maintain the refinancing rate and the interest rates on the liquidity regulation transactions at the current levels.
This decision was taken by the Members of the Board in line with the current inflation dynamics and inflation forecast, as well as external and domestic factors, which may lead to its sustainable deviation from the target of 5% for 2019 – 2020.
The Belarusian economy is developing in the continuing volatile external environment.
The high degree of uncertainty as to the development of situation in the foreign markets in future, including the concerns about the growth prospects of the global economy and major trade partners, creates the risks of rising inflation expectations and increasing fluctuations of the Belarusian ruble.
At the same time, the probability of sharp deterioration in external conditions in the short-term decreased. It is confirmed by the relative stabilization in Russia, including a decline in the volatility of the Russian ruble.
At the same time, temporary acceleration of inflationary processes in Russia is expected in 2019 due to the already adjusted exchange rate of the Russian ruble and taken decision on the VAT increase.
Materialization of external risks under the conditions of heightened inflation environment in the countries - major trade partners may adversely affect the maintenance of price stability in Belarus.
The economic activity in Belarus was gradually slowing down after high rates of recovery and got close to the equilibrium level, having no visible inflationary impact.
Consumer demand is still high, but its growth is gradually slowing down. At the same time, the level of household’s consumption is maintained, mainly, by current income. The consumer lending intensity went down.
In the medium-term, the neutral impact of economic activity on inflationary processes dynamics is expected.
The wage increase that took place in October 2018 creates the risks of inflation acceleration. At the same time, further wage growth is expected in line with an increase in labour productivity, and, as a result, will not have lasting inflationary effect.
Monetary conditions are close to neutral.
Mainly, it is due to the dynamics of the Belarusian ruble real exchange rate. Against the background of accelerated inflation in the countries - major trade partners, the weakening of the Belarusian ruble in 2018 Q4 led to the return of the real exchange rate to its equilibrium level. As a result, the disinflationary influence of the exchange rate was exhausted.
The interest rates are at the levels ensuring the maintenance of money supply within the set parameters and lending in the amounts which do not create inflationary risks. In November 2018, the annual average broad money growth totaled 9.3%, being closer to the bottom of the established range of 9-12%.
Inflation in Belarus slightly accelerated, mainly, due to the temporary factors.
In November 2018, the annual inflation totaled 5% (4.9% in October 2018) with a moderate increase in free prices and slowdown in the growth of administratively regulated prices and tariffs.
The core inflation in November 2018 increased to 4.1%. Acceleration in the free pricing segment was, mainly, due to the impact of market factors (rising prices for agricultural products). It is expected that their adverse impact on the general price level will be gradually decreasing, that is evidenced by the observed slowdown in the growth of this group of goods.
Additional factor of the core inflation acceleration is the raise in costs associated with an increase in fuel prices in the domestic market.
In general, the inflation estimate over 2018 has not changed. The increase in consumer prices will not exceed 5.5%.
At the beginning of 2019, a slightly temporary acceleration of the core inflation is expected, as well as a rise in headline inflation, due to the continued pressure of these market factors, as well as rising prices for imported goods and services, primarily, supplied from Russia.
Moderate inflationary influence is also observed on the part of the population’s inflation expectations. They slightly increased due to the unfavorable market conditions at the end of 2018.
Gradual slowdown in inflation is expected as far as these effects are exhausted.
The temporary nature of inflationary factors and the moderate magnitude of current risks make it possible to keep the interest rates in the economy at the current level. Inflation will remain on the path to achieve the goal.
According to the projection, inflation will be close to the target of 5% in 2019 – 2020.
The expediency of changing the refinancing rate in the future will be determined by the dynamics of inflation relative to the forecast, the probability and magnitude of the inflation risks materialization.