Expert word

No More Bets. Long Ago.

The other day the Bank of Russia lowered its refinance rate by 0.5 per cent down to 10 %. Predictions were made at once that banks would start reducing their deposit rates to keep the charged interests free from taxation.

Should we really expect interest rates on deposits to collapse due to this reason?

So what do we have? Really, the present Tax Code contains the following provision: an investor shall pay a tax in the amount of 35 % of the difference between the rate for the deposits placed and the refinance rate if accordingly the deposit rate is higher than the refinance one of the Central Bank. Note here that by and large a bank is in fact neutral on this tax, because it is paid by physical persons, and it is his personal income tax. Of course, there are transaction costs involved since the banks will have to register such payments, so banks will have costs to bear.

The question is if there are many banks that offer deposit rates above the refinance one? Today the average annual rate on ruble deposits is 9.2 %. Those charged by market leaders from Sber and major foreign "daughter companies" to big and medium-sized Russian private banks do not as a rule exceed 10 % either. Of course, there is a rather marginal group of banks that attracts investors with much higher rates. In that case and given a large deposit, the tax may indeed matter. But this will affect a very small part of investors and a rather insignificant group of banks. It should be noted here that on the one hand, such banks cannot give up their aggressive policy by lowering their rates because this will cost them their main competitive edge. On the other hand, investors of such banks would rather pay the tax from the difference between let’s say 13 and 10 % than take their money to Sber or Raiffeisen where the interest is almost twice as low. It's the economy, stupid!

The reduction of rates by Sberbank and similar steps by some other major banks have nothing to do with the changes in the refinance rate (for information on the lack of impact on the macroeconomic processes in the Russian Federation see the “Economic Simulators or Sets for the Finance Market". It is connected with other trends such as a lower inflation and the arrest of its further fall in the government’s plan and in the budget; greater possibilities for increasing major banks’ resources (growing credit ratings, attraction of loans from abroad, low interest bonds and, lastly, two IPOs, which made it possible to draw the liquidity into two major state banks).

As a matter of fact, deposits are just another way of funding and not the cheapest one at that. Rate changes are macroeconomic rather than regulatory. Sber and other banks had changed them well before the Central Bank did.

So the refinance rate is not to blame - let's consider it just as a kind of an independent indicator, meaning that nothing really depends on it.