The National Bank of Belarus (NBB) left its key refinancing rate unchanged at 10%, the regulator said in a statement published on December 10.

The move followed June's cut of the NBB's key refinancing rate from 10.5% to 10%. The central bank attributed the move to the fact that "projections concerning the situation in economy, foreign trade, the currency market, and the deposit market indicate that the emerging money and credit conditions will keep inflation within the targeted range".

According to the regulator, the 2018 inflation will not exceed 5.5% while the target has been set at 6%. At the same time, the Belarusian economy continues developing in the face of "unstable external factors", the NBB added. Specifically, a temporary increase in inflation pressure is attributed primarily to faster inflation in Russia.

The central bank forecasts the 2019-2020 inflation "to be close to the target of 5%". "The temporary nature of inflation factors and the moderate size of current risks allow keeping interest rates in the economy as they are," the NBB underlined.

Analysts were speculating before the decision that the regulator might by tempted to increase rates. VTB Capital (VTBC) listed the reason for a hike in a note that included:

i) rising inflation expectations;

ii) close negative GDP gap/strengthened domestic demand;

iii) challenging external environment; and

iv) relatively ambitious inflation target for 2019.

Volatile environment

The International Monetary Fund (IMF) confirms that inflation remains at historic lows in Belarus and in line with the NBB's target. At the same time, the multinational lender believes that Minsk should maintain its current monetary policy stance. 

"With inflation stabilizing in the 5-6% range, the current interbank target implies real policy rates of about 4-5%," the IMF said in its latest country report published in late November. "This is appropriate, as the pressures on inflation from rapidly growing wages may not have fully materialised yet."

In addition, the IMF believes, the volatile environment warrants erring on the side of caution. The central bank should continue its preparations for transitioning to inflation targeting. "Important strides have been made since 2015 towards a more predictable, rules-based monetary policy. To entrench these gains, we support the central bank’s goal of further progress towards full inflation targeting, albeit with realism given high dollarization and a legacy of fiscal dominance," the Fund added.

Efforts made to reduce directed lending and to liberalise the FX market are welcome and consistent with this goal, the multinational lender added. "It is now time to address other important distortions such as interest rate caps, which are inconsistent with the monetary policy framework and distort saving and lending decisions," the IMF believes.

Unchanged key rate next year?

The IMF also believes that policy independence of the central bank should continue to be respected and even deepened. "Increasing independence has been as important to the success of disinflation efforts and to the relative stability of the currency as any improvement to the policy framework," the multinational lender added in its November's report.

Meanwhile, the NBB's governor Pavel Kallaur told journalists on December 20 that the nation's key refinancing rate will remain at 9-10% by the end of 2019 given the fact that "there are no external shocks".

He also confirmed the NBB's plans to keep the inflation target for 2019 at the level of no more than 5% via the monetary targeting policy.

"Low inflation and a stable financial sector are key conditions for sustainable economic growth, the basis for building up trust in the current economic policy," BELTA news agency quoted Kallaur as saying. "Therefore, the NBB will be focused on achieving two goals, i.e. to maintain price and financial stability."