Deposits' interest rates are being lowered by financial institutions.
In Q1 2025, a shift occurred in the Russian banking landscape as interest rates on deposits dropped from a whopping 23-24% to more manageable 16-17%. Simultaneously, the Central Bank of Russia (CBR) kept its key rate at a steadfast 21%. Financial analyst Gregory Vakhtin, in an exclusive interview with our site, attributed this deposit rate adjustment to market expectations and CBR's key rate.
Vakhtin further predicted that if CBR's inflation concerns eased by the year's second half, it could lower its key rate by 2-3%, or even a more dramatic 5% over three years.
Long-term government bonds from the Russian Ministry of Finance, serving as a benchmark, demonstrated a downward trend. With maturities exceeding 3-7 years, these bonds traded at yields of around 16-17%, indicating a harmonious demand-supply equilibrium.
At present, VTB specialists predict a sluggish recovery of the credit market, expected only in the second half of 2026. Conversely, the retail lending market might shrink more than expected in 2025, with a projected contraction of about 30% by year-end - from 9.1 trillion rubles (per initial forecasts) to 8.8 trillion.
As we stand, the CBR's key rate lingers at a record high. Yet, the eventual reduction of this rate could have far-reaching impacts on both the banking system and retail lending. Here's a breakdown:
Impact on the Russian Banking System:- Easing monetary policy could trigger increased lending activity, enhancing liquidity and reducing pressures on banks.- A surge in credit flow might stimulate economic growth, although it could also stir up inflationary pressures.
Impact on the Retail Lending Market:- Lower borrowing costs could boost consumer spending and property markets.- Increased consumer debt could pose long-term sustainability challenges if not managed responsibly.- Enhanced lending activity from banks might lead to more credit availability, but risks of non-performing loans could rise as well.
In conclusion, rate cuts could foster growth and credit access, but could also fuel inflation and unsustainable debt. Given the current focus on controlling inflation, the CBR may proceed with caution when weighing potential rate adjustments.
[1] Effects of Monetary Policy and Interest Rates on the Banking Sector[2] Managing Inflationary Pressures and Central Bank Decisions[3] Potential Growth and Risks in the Russian Economy[4] Assessing the Impact of Consumer Debt on Economic Sustainability**
- I'm not sure if the Central Bank of Russia (CBR) will lower its key rate as predicted by financial analyst Gregory Vakhtin, considering the current focus on managing inflation.
- The shift in deposit rates in Q1 2025, coupled with the CBR's inflation concerns, might influence the future of bond investing, particularly long-term government bonds currently trading at yields of around 16-17%.
- If the CBR's inflation concerns do ease in the second half of 2025 as predicted, it could have significant impacts on the business of both the banking system and retail lending, potentially fueling growth and credit access but also leading to unsustainable debt.
- Given the anticipated contraction in the retail lending market in 2025 and the potential risks associated with increased lending activity and consumer debt, it's crucial for banks to approach investing in Russian bonds and retail lending with caution.
