On the bottom: interest rates reached record low levels
From the beginning of 2011 the Bank of Russia stopped controlling deposit interest rates after credit institutions saw improvements in their liquidity conditions. Indeed, in 2010 the volume of deposits in Russian banks increased 17% according to our estimates. At the same time, interest rates for borrowed funds have reached a 10-year low (see the figure).
Figure. Funds borrowed by banks and deposit interest rates
* IFS estimates
**interest rates for a deposit with a 181 days to 1 year maturity
Source: Bank of Russia
Falling deposit profitability was the main cause of a decline in the growth of borrowings. Although the actual yield from deposits in the beginning of 2011 was negative, this type of savings remains one of the most reliable and accessible for households.
Banks, in their turn, understand that households are showing a stable demand for deposits, and interest rates reduction does not have a strong impact on money inflow. In 2011 banks will hardly continue lowering deposit interest rates, however, as they have reached a record low level.
Increasing mismatches between inflation and interest rates could lead to higher consumption rates. This would boost the domestic demand on the one hand and fire up inflation on the other. At the same time, growing prices directly influence the cost of borrowings that are already declining because of high interest rates. It looks like this year the central bank will be facing a challenging task - to balance the cheap money policy with the attempts to curb inflation.
By Galina Kovalishina,
head of the Corporate Finance Department
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