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Bets in the red: what can change the situation

With official inflation of 10% and a sharp devaluation of the hryvnia, the standard rates in banks on the most popular deposits today are in the range of 7.5-8.5%. Taking into account the taxation of deposits and the situation with the unstable hryvnia exchange rate, real rates thus went into a deep minus. On deposits in foreign currency (in dollars and euros), banks pay quite ridiculous interest – no more than 1% per annum. However, people continue to carry their money to banks, and bankers are in no hurry to increase the profitability of deposits, since most Ukrainians have practically no real alternative to keep their money from inflation, and banks know this.

The economic crisis caused by the pandemic was the first crisis in Ukraine, during which the domestic banking system did not feel the outflow of deposits. On the contrary, there was an increase in deposits, and it continues to this day, despite the extortionate conditions of the banks. The reasons for this situation lie in the real and psychological non-alternativeness of bank deposits. This tool has long been a simple, profitable and relatively risk-free way to store money. The situation is changing, but Ukrainians are not yet ready for more active forms of investment. Whether deposits can again become an attractive instrument depends today on a number of reasons.

In January, the National Bank raised its discount rate from 9 to 10% per annum, hinted at its further increase closer to spring to 11%, and also increased the reserve ratio and announced a change in its behavior on the interbank market in terms of interventions. In addition, the market is digesting the worsening macroeconomic forecasts by the regulator: for annual inflation – from 5 to 7.7%, and for GDP growth – from 3.8 to 3.4%.

The increase in the NBU discount rate and the reserve ratio is aimed at monetary suppression of inflation, although at present the rise in prices has far from monetary reasons and is associated primarily with a change in the structure of supplies and demand for goods, and not only in Ukraine itself. The same factor in the global increase in energy prices cannot be controlled by our officials. The weakening of the hryvnia exchange rate, obviously, is also associated not with an excess of money from the population, but with an aggravated threat of an invasion by the Russian Federation.

But back to deposits. According to the NBU’s interpretation, the annual fixed-term deposit rate in the national currency not lower than the inflation rate or the NBU discount rate can be considered economically justified. Only then are savings protected from depreciation, and bank deposits can be considered commercial. Based on these considerations, the NBU and financial market experts reasonably expected an increase in the return on deposits, arguing their expectations with the announced annual inflation rate for 2021 at 10% and the discount rate, which also amounted to 10% in January. The first reaction of banks seemed to justify these expectations, and rates began to rise: from January 1 to January 21, 2022, UIRD (Ukrainian index of rates on deposits of individuals, calculated in the Thomson Reuters system based on nominal rates in 20 largest Ukrainian banks) by 12- monthly deposits rose from 8.98 to 9.05%. Modest, but still. However, over the last ten days of January, the average rates on annual deposits in hryvnia with no less success, ignoring economic laws and recommendations of the NBU, rolled back to 8.97%.

The reason for this behavior of bankers is not quite typical for a crisis situation — the hryvnia liquidity of the banking system today remains ultra-high (more than UAH 200 billion), and banks not only do not line up depositors in order to withdraw money, but there is a steady increase in household funds, mainly , however, thanks to current accounts. Accordingly, the bankers are in no hurry and are unlikely to rush to raise rates until this situation changes.

Banks will experience a real need for money only in the event of a significant increase in lending. In the current conditions of uncertainty, this is hardly worth hoping for. Although loan portfolios in hryvnia are growing at a relatively fast pace today, outpacing the growth of deposits (the growth of the net portfolio of loans in the national currency over the past 12 months was 40%), but this cannot radically change the situation with super-liquidity. Significant changes in this market can only be made by the promised initiatives of the state to launch preferential lending programs for the purchase of housing, electric vehicles or education. If this happens on a sufficiently large scale, then the situation can really change a lot, and deposit rates may rise a little more significantly.

The dynamics of deposit rates can, of course, be affected by the political situation in the country, as well as the activities of the regulator. For example, with the introduction of the NBU standard NSFR (net stable financing ratio), banks will be forced to balance assets and liabilities by maturity, so they can begin to actively attract deposits for longer periods and at higher interest rates. But even here one should not expect special generosity of bankers.

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