Russian Central Bank sees risk of lending slowing more quickly than necessary to bring inflation back to target
MOSCOW. Dec 24 (Interfax) - Interest rates on deposits and loans rose significantly higher in November-December than the Central Bank of Russia's key rate of 21%, heavily impacting lending activity, and there is a risk that the slowdown in lending could become faster than the regulator needs to bring inflation back to its target, CBR Monetary Policy Department Director Andrei Gangan said in an interview with Interfax.
"As soon as we received preliminary data on lending in November, we published it immediately in the following informational and analytical material. We have never done this before. It seems to me that market participants paid insufficient attention to this data. Meanwhile, the trends continued to develop rapidly. Throughout December, we received increasing confirmation of tighter monetary conditions, culminating in Friday's decision," Gangan said.
According to Central Bank data, banks' corporate loan portfolio grew only 0.8% in November compared to 2.3% in October, which aligns with the historical average for 2018-2021.
The tightening of monetary conditions can be attributed to several factors, including the largest banks' need to meet short-term liquidity requirements (STLR), stricter capital requirements and banks' increasing assessment of borrower risk, Gangan said.
"Some banks may have been overly optimistic about their ability to quickly transition out of the regulatory relaxations introduced by the Central Bank in 2022 and which were later phased out. This involves several aspects. One is the short-term liquidity requirement. The need to independently observe this requirement has significantly increased competition among banks for corporate client deposits. As a result, starting in October, deposit rates for legal entities surged even for very short terms, including overnight deposits. The situation worsened in November, with banks willing to offer large corporate clients deposit rates exceeding the key rate by 2 percentage points or more, even for short-term deposits. Consequently, banks' transfer curves, affected by higher liquidity premiums, diverged upwards from money market rates, and spreads for floating rates also went up," Gangan said.
The rise in interest rates was further exacerbated by the announced increases in capital adequacy surcharges.
"Now banks have to use their capital more sparingly, embedding higher premiums for the use of their own capital into borrower rates. Add to this the rising borrower risk assessments by banks in recent times, which are also reflected in loan rates. Over the past two months, borrowing costs for corporate clients have increased due to autonomous factors by at least 2-3 percentage points," he said.
The CBR received information in recent weeks that banks' plans for expanding their loan portfolios next year have been revised significantly downward, he said.
"The current price growth we are observing is the result of factors that have accumulated over most of this year. However, it's important to understand how these factors will develop further and how they will influence price dynamics in the future. This brings us back to Friday's decision and the arguments presented. Lending is starting to slow down, but there is a risk that this slowdown could be faster than necessary for bringing inflation back to the target," he said.
