Belarus Hikes Interest Rates By 26% To Stave Off Crisis

By Ben Aris
BNE

President of Belarus, Alexander Lukashenko.

Danske Bank reported late on December 22 that the National Bank of Belarus has hiked interest rates by 2,600 basis points (26%) to stop the Belarusian ruble from collapsing.

Queues formed outside currency exchange kiosks last week as the effects of the tanking Russian ruble spilled over the border and destabilized the Belarusian currency.

Danske Bank said in a note to clients, released on the evening of December 22:

• Belarus is hiking its key rate by 2,600bp as the Russian rouble dives
• Belarus continues to tighten capital controls
• The bank expects the imported monetary shock to send the country into recession in 2015

Dramatic events in Russian markets last week (the Bank of Russia’s aggressive monetary tightening on the diving rouble) are spreading to the financial markets and economies of Russia’s CIS neighbors. Armenia, Belarus and Kazakhstan’s pegged currencies have been under significant pressure, as the rouble saw a 36% move against the US dollar within one day, volatility skyrocketed and Russia’s central bank hiked its policy rate by 650bp.

With the Belarusian rouble pegged to the US dollar, the euro and the Russian rouble, which entered free float in November 2014 and has been ‘free falling’ ever since, speculation has been mounting in Belarus that the Belarusian rouble (BYR) could be devalued. To avoid a sudden fall, the Belorussian currency has been allowed to lose 15% within 12 months, as we previously expected.

Last Friday, the National Bank of Belarus (NBB) reacted to this pressure and hiked its key policy rate to 50%, from 24% previously. Furthermore, the authorities tightened currency controls by imposing a 30% tax on buying foreign currency and banning OTC trades in the BYR until 2017.

The commitment to continue with the peg means we expect a very significant tightening of monetary conditions in Belarus and as nearly always happens when such a tightening occurs the country will see a sharp fall in economic activity. Once again, it seems as though the Belarusian authorities are importing a crisis from Russia, not only from the foreign trade channels but through monetary policy mechanisms too. Thus, we expect the country’s GDP to shrink by up to 3.1% y/y in 2015 despite the expected 1% per month devaluation of the BYR. In addition, we believe 2015 will be an ‘interesting’ year for Belarus –presidential elections are due to be held in November 2015.

Courtesy of BNE

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