Key Factors to Further Decrease Belarus's Refinancing Rate

The monetary policy of the National Bank of the Republic of Belarus is aimed at supporting all market interest rates at a level that enables it to target inflation in order to ensure financial stability and sustainable economic development.The refinancing rate set by the National Bank is a key tool to regulate all financial market interest rates and is used as a benchmark to set interest rates on loans provided to banks to maintain their liquidity. There are many factors that determine the optimal level of the bank refinancing rate, including both domestic and external ones, fundamental and cyclical factors. At the same time, domestic factors play a major role in the process. The most important of these are inflationary expectations, the deviation between the forecast and target rates, the output gap, the risk premium and potential changes in the real exchange rate balance.According to the analysis, the author concludes that the real refinancing rate is currently at its neutral level of 4.5–5.5% and its further movements will depend on inflationary expectations and changes in fundamental factors which determine the bank refinancing rate’s neutral level and do not depend on the monetary policy of the National Bank. If pro-inflationary risks materialize, interest rates could again increase above the neutral level