The fall of interest rates in Russia is accelerating as many of the country’s leading macroeconomic indicators are dropping to the level of a normal country’s.

Russian banks have been cutting their commercial interest rates to keep up with plummeting inflation – now at its lowest level in modern history of 2.5% – and the concurrent cuts in the monetary policy rate made by the Central Bank of Russia (CBR). The CBR surprised in December with a 50bp cut in rates, against the market’s expectation of a 25bp cut, thanks to the extraordinarily low levels of inflation.

Last year commercial interest rates dropped below the key 12% mark, above which the government was prepared to subsidise mortgage borrowing in an effort to put people into their own homes and to help the struggling banking sector out.

Over the first month of this year banks have continued to cut rates, while maintaining their net interest margin (NIM), the difference between the cost of money they borrow and the rate which they charge customers for loans.

At least a third of Russia’s large retail banks also reduced the interest rates on ruble deposits for the population as the cost of money continues to fall, reports Vedomosti. Some banks cancelled the New Year's seasonal special deals, others adjusted the rates on all or part of their basic deposit packages. The reduction in rates was 0.2-1 percentage points, depending on the bank, the term and amount of the deposit. Now the rate on retail ruble deposits in the vast majority of banks is under 8%.

Another factor driving the interest rates down is that while deposits have been growing steadily over the last two years, loan growth has not. Banks have sufficient money in their vaults to cover their need for capital to make loans. As there is no need to attract more deposits they have been cutting interest rates instead to improve profits.

And more CBR rate cuts are coming. The CBR monetary policy committee is due to meet next on February 9 and is widely expected to cut rates again by another 25bp. Sberbank President Herman Gref predicts the CBR will cut rates by a total of 2% this year to 5.75%.

The falling interest rates are having several effects. Firstly they are bolstering mortgage borrowing. Residential developers like PIK used to finance a fraction of their sales using mortgages, but now mortgages account for up to more than half of sales. Falling rates has also underpinned consumer borrowing, which has risen dramatically in the last year.

Borrowing from banks has doubled over the last eight years since the crisis began. Russians borrowed from banks RUB12 trillion ($210bn) in January-November 2017, up RUB1.2 trillion or 10% year-on-year, while their deposits, although more than twice as much at RUB25 trillion, were up just by RUB800bn, which corresponded to just a 3% increase.

It is still possible to get a deposit account that pays more than 8% but these rates are now only offered for short-term deposits. As for decades the default Russian retail investment has simply been to put cash on a high yielding deposit account, the falling rates has also spurred the man in the street to start looking around for alternative and better returning investments. Real estate is one popular alternative, but a slew of investment products have appeared and Moscow Exchange (MOEX) reports that the number of retail accounts opened with the exchange is up by more than half in the last year.

As for dollar deposits little has changed. Most accounts pay a meagre 1.5% interest on dollar deposits, although a few banks will pay 2% but then restrictions on withdrawal apply.

 

Rates of ruble demand deposit accounts, % per annum

 

	3 months			6 months			12 months
Bank	RUB300,000	RUB1.25mn	RUB10mn	RUB300,000	RUB1.25mn	RUB10mn	RUB300,000	RUB1.25mn	RUB10mn
Sberbank	4.52	5.68	5.98	4.7	5.87	6.18	4.65	5.85	6.17
VTB	7.14	7.14	7.14	7.14	7.14	7.14	7th	7th	7th
Rosselkhozbank *	6.8	6.8	6.8	6.8	6.8	6.8	7.05 *	7.05 *	7.05 *
Gazprombank	6.6	6.8	6.8	6.6	6.8	6.8	6.6	6.8	6.8
Alfa Bank	5.83	6.03	6,13	5.87	6.08	6.18	5.69	5.9	6.01
Binbank	7.7	7.7	7.7	8	8	8	8	8	8
FC Opening	7.2	7.5	7.5	6.95	7.25	7.25	6.7	7	7
Promsvyazbank	8.1	8.1	8.3	8.1	8.1	8.3	8.1	8.1	8.3
Raiffeisenbank	5.02	5.42	5.73	5.05	5.56	5.77	5.12	5.54	5.64
Sovcombank	7.9	7.9	7.9	8.1	8.1	8.1	7.7	7.7	7.7
ICD	6.75	6.75	6.75	8.5	8.5	8.5	7.75	7.75	7.75
Rosbank	6.3	6.5	7th	6.5	6.7	7.15	6.4	6.6	7.1
UniCredit Bank	8.02	8.02	8.16	8.1	8.1	8.25	7.5	7.5	7.5
MIB	6.85	6.85	7.1	7.5	7.5	7.76	7.5	7.5	7.75
Uralsib	5.83	6.03	6.03	5.97	6.18	6.18	6.06	6.27	6.27
Home Credit Bank	8	8	8	-	-	-	7.549	7.549	7.763
UBRD	6	6	6	6.25	6.25	6.25	6.52	6.52	6.52
Russian standard	7	7	7	7.5	7.5	7.5	7.5	7.5	8
Oriental	7.8	8	8.1	8.08	8.29	8.39	8.14	8.35	8.46
Revival	6.28	6.54	6.79	7.4	7.4	7.4	7.4	7.4	7.4
Tinkoff Bank	5.64	5.64	5.64	7.22	7.22	7.22	7.22	7.22	7.22
Russian Capital	8	8	8	7.25	7.3	7.35	7.2	7.25	7.35
Citibank	4,5	4,5	4,5	4.75	4.75	4.75	5.5	5.5	5.5
Post Bank	-	-	-	7.1	7.1	7.1	7.2	7.3	7.3
AK Bars	7.25	7.25	7.25	7.5	7.5	7.5	7.75	7.75	8.85
Renaissance Credit	7	7	7	7.5	7.5	7.5	7.5	7.5	7.5
Absolut Bank	6.95	6.95	7.25	7.45	7.45	7.75	7.7	7.7	8.5
Bank Rosgosstrah	7	7.1	7.1	7	7.1	7.1	6.9	7	7
Zenith	5	5	5.75	6.75	7	7.35	6.25	6.5	7.1
MTS Bank	7th	7.5	7.5	7.25	7.75	7.75	6.8	7.3	7.3
Sviaz-Bank	6.8	6.9	7.05	7.15	7.2	7.4	7.3	7.4	7.65
Globex	7.5	7.5	7.5	7.9	7.9	7.9	7.9	7.9	7.9
OTP Bank	7.1	7.1	7.1	7.4	7.4	7.4	7.1	7.1	7.33
Transcapitalbank	6.15	6.15	6.15	7.16	7.41	7.88	7.47	7.74	8.27

* contribution for 13 months

Source: Bank data as of 01.19.2018