Real deposit rates close to zero
Experts warn about a threat of outflow of the population’s money from banks
Russian banks can keep lowering rates of deposits in rubles. After a record fall in the Central Bank’s key rate in July — an all-time low of 4,25% — most analysts forecast it will go on falling in September as well, at another meeting of the regulator. The CB began lowering the key rate last summer, and deposit rates for both the population and legal entities decreased after it, including in Tatarstan banks. Banks raised their rates only twice — in late May because of an outflow of deposits and in early summer hoping that Russians who couldn’t go on holiday would deposit money in accounts. As Realnoe Vremya’s analytic staff found out, deposits are now cheap by 1%-3%, and given the inflation, deposit rates for the population turned out negative.
Deposits are less profitable
Observers linked the Central Bank’s decision in July — to decrease the key rate by the lowest 0,25 points, to 4,25% — with the regulator’s desire to evaluate the influence of the fall in rates on the economy. A lot of analysts consider the tendency will stay, this is why Russian banks wait for a gradual reduction in the rate of deposits in rubles till the end of the year after the dynamics of the CB’s rate.
Bank deposits for natural persons and deposits for legal entities are becoming less profitable, as the deposit rate reduces in banks, including in Tatarstan, with the fall in the key rate. Last year, Elvira Nabiullina’s team increased the key rate till late June, which influenced the costliness of credit, high mortgage rates and deposit rates at the same time.
How banks’ deposit rates reduced after the CB’s decisions
The key rate was 7,25% from August 2018 to late September 2018, then it was raised to 7,5% and added several points in early 2019, to 7,75%. This key rate of the CB held in the end until June 2019 when the Central Bank changed the rate and reduced it to 7,5% last July, to 7,25% in August. In October, it was lowered to 7%, to 6,5% in November. Then it decreased about once in two months.
In early 2020, the rate fell to 6,25%, to 6% in March, to 5,5% in May, during the epidemic and lockdown. And in the middle of June 2020, it already totalled 4,5%. Since the CB’s rate changed, the key rate has already decreased by 3,5%, almost twice or, more precisely, 1,8 times.
Mortgage rates, which are always above the CB’s refinancing rate, look like an illustrative example because of banks’ desire to earn on the margin. If mortgage rates for second-hand dwelling fluctuated from 10% to 12% in 24 banks of Tatarstan on average in January 2019, by late June, there was almost no rate above 10%, the average mortgage rate fell to 9,7%. While mortgage rates for new homes in Tatarstan went down from 10,9% to 8,4%.
The highest deposit rate decreased at the same time. According to the Russian Central Bank itself, the highest rate (deposits in Russian rubles) in ten banks of Russia with the biggest number of deposits of natural persons reduced by 44%. When the key rate was at the highest level — 7,75%, the highest interest rate in Russian banks was between 7,5% and 7,27% with a tendency for reduction.
By early 2020, with the CB’s rate of 6,25%, banks offered deposits for 5,93%. After the key rate’s trend changed, there was a more direct dependence of the rate on deposits. Moreover, banks guessed the moods of the CB, speculated a lower reduction at times expecting the next fall in the key rate. So in late January Russia’s biggest banks reduced ruble deposit rate en masse getting ready for the next fall in the key rate. At the height of the quarantine, the highest deposit rate in Russia exceeded the key rate by 0,01%, in this middle of June this year when Nabiullina’s team reduced the key rate to 4,5%, which was unlikely just two years ago, banks offered deposits that were 0,5% higher than the Central Bank’s.
Real deposit rate is close to zero
In a message in July, the CB clarified its inflation outlook. “According to the Bank of Russia’s forecasts, given the monetary policy, the yearly inflation will be 3,7%-4,2% in 2020, 3,5%-4,0% in 2021 and will be close to 4% in the future.” It turns out that the real deposit rates are now almost equal to zero.
In this situation, late last week banks already saw increased demand for a new issue of federal bond for natural persons for 15 billion rubles. The population’s demand for this tool will grow, and the Russian Bank’s policy on the key rate reduction is the main driver, bankers themselves think. Moreover, the newly issued bonds with 5,63% yield to maturity were offered on the first day of sales, while we should remind you that the average highest deposit rate in the top 10 Russian banks for natural persons in rubles in late July — before the Friday announcement of a lower reduction in the rate — was 4,55% a year. In other words, federal loan bonds are at least by 1% more profitable than deposits (but considering inflation, the yearly profit will unlikely exceed 1,5%).
Sergey Akulchev Director General and owner of Akulchev TH PLSC
It has never been profitable in general to deposit money in banks. Banks earn money, while natural person earn peanuts if they do. A business, of course, should have some insurance deposit for the rainy day, no more. What a business is it to earn on 3-4% deposit interest a year? Banks used to make money from speculation, now they simply make money from payments [for credit], from natural persons and legal entities. And these is less speculation. All banks stopped running the risk, they need guaranteed, fixed, stable incomes.
They don’t have competition, this is why their profitability is also reducing step by step because nothing ventured, nothing gained. Banks try to reduce risks to zero, consequently, they try to earn something at the same time. But it doesn’t work this way. Interest is a rate for risk, it must be balanced. There must be both risky and moderately risky investments. Some must be risk-free. Then the economy will develop, and banks will have money. Now banks earn primarily on money and can’t earn much. The reduction of the Central Bank’s rate and cheap money will always help the economy, of course. I think if only there had been such money, if only the population didn’t withdraw its money from banks and put it in the pocket, there is such a risk now.
Albert Bikbov Economist
“We can say that deposits have become unprofitable with some restriction. Why? Because we always should base on the concept of the real interest rate. We should exclude inflation pace from the key rate and therefore get the real interest rate — now it is approaching zero. In fact, now the instruments of storage and saving are becoming unprofitable. In the case of currency investments, there is, in turn, a risk of the influence of the oil situation. And the situation can repeat when people stocked up on the dollar, which was above 75 rubles and were at a loss because oil prices rose, and the dollar rate decreased.
When the real rate is close to zero, there is less sense in storing money in banks, but still, are there alternatives to this? There are a few alternatives. For instance, it is realty. And Russian citizens will now start redistributing their assets. And we see significant outflows now: it is Russians’ reaction to the low rates. But an investment in realty doesn’t provide a lot of return though exceeds the profitability of bank deposits. And in some lucky cases one can make a profit thanks to the growth of the price for the square metre (up to 6%-7%, sometimes more). But here it is necessary to know what is profitable, live in Sochi, have big experience in realty investment and don’t face abandoned construction projects and obvious frauds. The stock market doesn’t gladden either, the shares have cheapened very much. There is probably some sense in investing in them, but only considering long-term prospects. The market will rebound only after the consequences of the coronavirus, high oil prices are eliminated and the economy stabilises. And it can take years.
The CB’s refinancing rate reduction is an element of the stimulating monetary policy, demand, active investment are stimulated. One shouldn’t forget that credit rates reduce together with the key rate reduction. Deposits lose their sense but credit becomes cheaper. We can even welcome a 6,5% concessionary mortgage rate. It turns out the CB is trying to spur activity in the economy, but economists say that this policy has a dangerous side. When rates reach zero, such a stimulating policy will become pointless. It will become impossible to stimulate the economy by reducing the rate, while it is necessary to stimulate it. We can remember the economy of Eurozone countries when deposit rates reached negative digits. Then the budget has to stimulate the economy, which is also fraught, especially today when it is hard to find money in the budget to stimulate economic growth.
Marat Sabirov Director of Freedom Finance IC’s Kazan office
“Deposits in banks in general stopped being interesting for both natural persons and legal entities a long time ago because of inflation, first of all. But now people don’t see any sense in depositing their money because bringing some savings, they get a sum that can’t be spent on anything. As for alternatives to bank deposits, for instance, we should remember federal loan bonds, which were much profitable than deposits, and they always have higher rates than deposits.
But the same bonds don’t have alternatives. Currency purchase is an ambiguous venture, it can bring zero or even negative result during the year. We don’t know after all how currency rates will change. It does take much wits to simply open an account, buy federal loan bonds and receive more than deposited money. I think it is a riskier decision to buy dollars.
Cheapening money caused by the reduction in the key rate is the main tool that influences the economy in many countries. They reduce the rate before they start to issue money. But we shouldn’t forget that central banks around the world are acting in coordination today. And when some of the big CBs reduces the rate, others usually do the same. This is how the modern financial system works — it is quite global. The rate reduction is obviously more profitable for a business, not the population.