After nearly seven years of cutting interest rates the real effective rate of return on bank deposits fell to almost nothing, prompting Russian retail investors to start to look for new investments that paid a better return, with many moving into equities. But now interest rates are rising they are moving their money back to banks.
The switch to equities this year helped a nearly year-long rally on the dollar-denominated Russia Trading System (RTS), which saw the index rise to touch 1,900 in November – a level it hasn't visited for nearly a decade – and saw the RTS index returning over 30% YTD in November.
Russian retail investors have been flocking to the stock market this year for the first time and retail investor trading already makes up some 40% of the turnover on the Moscow Exchange (MOEX). Investment into foreign listed stocks has been especially popular, mainly happening on the SPB Exchange, which listed its own shares on its own exchange this month in a highly anticipated IPO.
The RTS has since sold off its recent highs and was down to 1,600 as of November 27 and is now returning around 20% YTD, as geopolitical tensions over Ukraine built rapidly in the last few weeks, and then was hit by more worries as reports of a new variant of the coronavirus that the WHO labelled as “of concern” appeared in Africa and which has started to spread rapidly around the world.
At the same time, the real interest rate dynamic on bank deposits has changed after the CBR started aggressively hiking rates this spring to curb soaring inflation, with hikes in March (25bp), April (50bp), June (50bp), July (100bp) and September (25bp). While Russia has been running negative real interest rates for about the last four years, rates became positive again in October last year and the recent hikes put in place by the CBR have kept the monetary policy rate ahead of the inflation rate in recent months, despite the continued acceleration of the rate of consumer prices.
The rising CBR monetary policy rate has pushed up the commercial rates on bank deposits and coupled with the sell-off on the stock market have combined to make the tradition protection of putting savings in bank deposits more appealing again, as the chart of rising interest rates at the leading commercial banks shows.
"Growth in ruble deposit rates in the third quarter increased the attractiveness of bank deposits, which expanded the inflow of household funds to banks in September. The annual growth of balances in household accounts and deposits was up from 3.5% in August to 4.6% in September," the CBR reports.
In September, the inflow of household funds to ruble accounts and deposits totalled RUB167bn ($2.23bn) vs RUB30bn in August.
The structure of household deposits predominantly consisted of deposits with maturities from one to three years (RUB118bn), whose rates increased most notably in August–September.
The inflow of funds to current accounts amounted to RUB14bn ($186mn). The growth in escrow account balances [used to buy housing] continued to slow down in September, totalling RUB131bn vs RUB150bn a month earlier.
“In the short term, elevated interest rates will continue to support the demand for time deposits compared to current accounts and, in general, influence the structure of households’ savings,” the CBR says.
Currently, the interest rate on deposits for up to a year is 8.78 in October according to the CBR, ahead of the 8.1% monetary policy rate – give a real return on the investment, but still with a fairly thin margin of less than 100bp.
However, with the early November results for consumer inflation suggesting that inflation growth has passed peak, the outlook for returns on bank deposits is looking better and the spread is expected to improve as the winter wears on.
“In September and October, banks continued to increase their rates on ruble deposits. The growth of deposit rates was conditioned both on the earlier tightening of monetary policy by the Bank of Russia and on expectations of a further key rate increase,” the CBR said in its monthly liquidity report. “In November–December, the potential for further growth in deposit rates remains in place as a result of adjustment to the October key rate increase, as well as because of expectations of the further tightening of monetary policy. Competition between banks in the retail segment of the deposit market may also lead to higher deposit rates in the coming months.”