Mongol Bank maintains policy interest rate at 10%
The Monetary Policy Commission of Mongol Bank convened on September 20 and made the decision to retain the policy interest rate at 10 percent due lower inflation rates in August and improving macroeconomic performance.
“In the past few days, the exchange rate of one USD against the tugrug has reached 2,515 MNT. Individuals and companies with dollar loans are at risk due to this. As a result, we have implemented several measures to stabilize the financial market which will take effect on January 1, 2019. For instance, the risk weights for foreign currency loans were increased from 120 percent to 150 percent. This decision was made because it is not possible for a bank to manage exchange rate risks. Despite the fact that they lack revenue in foreign currencies, many individuals and companies have opted to take out loans in foreign currencies. The increase of risk weights on foreign currency loans will improve the discipline and increase the responsibility of banks,” said Deputy Governor of Mongol Bank B.Lkhagvasuren.
Risk weights are is capital required to be set aside for banks that provide foreign currency loans. There is a multitude of other loans that a central bank can impose a risk weight on including consumer loans, mortgage loans, among others. Increasing risk weights on foreign currency loans can dissuade banks from handing out such loans. This in turn is designed to protect the consumers from exchange rate risks.
Most analysts and economists expected the commission to retain the 10 percent rate as business loans and loans in general have increased and the tugrug is on a trajectory of depreciation. In April, the commission lowered the policy interest rate by one percentage to make it 10 percent; it’s lowest in nine years.
After the press conference to announce the retention of the 10 percent policy interest rate and the increase of the risk weights on foreign currency loans, Mongol Bank officials took questions from the media.
What is the reason that the US dollar to tugrug exchange rate surpassed 2,500 MNT?
Of the 170 national currencies in use globally today, 52 percent of them depreciated against the dollar. For instance, in the last six months, the Chinese Yuan depreciated by eight percent, Korean Won depreciated by five percent, and the Russian Rubel depreciated by 15 percent. The policy decisions made by the US Federal Reserve and the ongoing and escalating trade war are the main reasons for this. This has impacted the tugrug, which has depreciated three percent this year against the dollar. Mongol Bank does not view this as a sudden fluctuation.
We will have to live with minimal depreciation of the tugrug. Moving forward, there should be no financial pressure stemming from tugrug depreciation. We are still very much dependent on foreign markets. As a result, we cannot accumulate too much risk. Businesses must not fall under debt pressure. We need to manage the growth and expansion of our economy. Our foreign economic environment must be in balance with our domestic one. In addition, the price of copper and gold fell while petroleum prices have risen, which have contributed to the three percent depreciation. Imports were also a large factor. Foreign trade is in a surplus and exports are still high. However, a 20 percent increase in the price of petroleum will inevitably affect the tugrug.