Mongol Bank cuts policy rate to all-time low of 9%

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Mongol Bank’s Monetary Policy Committee issued an emergency one percentage point cut to the policy rate on April 13 to decrease it to an all-time low of nine percent.

It comes a month after the central bank cut the rate from 11 to 10 percent in response to economic challenges stemming from the COVID-19 pandemic and limit potential economic risks.

In addition to the policy rate cut, the committee decided to extend loans of struggling individuals and companies by up to 12 months. 

“By lowering the policy rate, commercial banks will be able to increase lending and higher competition will push them to lower credit interest rates. This will stimulate the economy,” the committee said.

Mongolia's policy rate

Mongol Bank representatives answered questions after making the announcement.

It’s still unclear whether lowering the policy rate to nine percent will support lending and borrowing activities. Can you elaborate on the decision?

Money policy decisions tend to be far-sighted and the latest decision was made based on economic forecasts for this year. Compared to our outlook made in March, we now view that there’s room for changes to the monetary policy.

As of February, business loans increased by 9.6 percent year-over-year. This type of economic shocks tend to come with risks of financial intermediation failure. Although commercial banks are required to issue loans, if a company’s sales are expected to decline, the bank will not want to give out a loan. We call this credit disruption. As we assessed risks of this happening in March, we decided to cut the policy rate.

Moreover, banking competition must increase from now on. Banks must compete to find low-risk borrowers. In return, this will bring positive impact on lending conditions, starting from credit interest rates.

How has Mongol Bank’s economic outlook changed?

In March, the Monetary Policy Committee forecasted growth to be 4.1 percent in 2020. Back then, the committee expected the COVID-19 situation, especially in China, to subdue by April. It also predicted the economy would rebound at the end of the second quarter of 2020.

As predicted, China’s economy has started to improve as the disease outbreak subsided. However, the situation is different in China’s key traders, the USA and Europe. Taking this into account, the economic slowdown is expected to resume through the second quarter. The 2020 economic growth outlook is now 1.8 percent. We’re anticipating inflation to average 4.8 percent in the second quarter, 3.8 percent in the third quarter, and 6.6 percent in the fourth quarter this year.

Will the swap deal be extended?

Mongol Bank is talking about extending the swap deal by three more years with the Chinese side.

How is the situation at Arig Bank now that an independent representative is there?

An independent representative appointed by Mongol Bank is currently working at Arig Bank to ensure proper governance and fulfill assignments given by Mongol Bank’s president. We’ll probably see results soon.

Has the central bank permitted MCS Group to operate a virtual bank called “M”?

We’re looking into the permit for M Bank.

OUTSTANDING MORTGAGE IS 4.6 TRILLION MNT

Total outstanding mortgage debt has reached 4.6 trillion MNT as of April 13, according to Mongol Bank.

At present, there are around 97,000 people with mortgages in the country. The majority of them (72,000 loan holders) received financing through the government’s program for mortgages with eight percent interest rate and their outstanding debt amounts to 3.4 trillion MNT, reported A.Enkhjin, director of the Reserve Management Financial Markets Department.

Parliament is reviewing a draft resolution aimed to extend mortgages and postpone their repayment for six months. The Ministry of Finance, Mongolian Mortgage Corporation and commercial banks have reportedly mutually consented to the initiative. 

Those who wish to get their loans extended are required to submit an official request at their corresponding bank before May 1. Banks have started accepting loan extension requests.

A.Enkhjin noted that the draft resolution includes incentives to loan holders who are repaying their loans normally. In particular, if Parliament passes the resolution, the state will cover two percentage points of interest rate of loans that are being repaid according to schedule without an extension.

He added, “Within the scope of the International Monetary Fund’s program, Mongol Bank ceased funding to the mortgage program on January 1, 2020. However, we view that it’s possible for Mongol Bank to get involved in the financing program in the same principle as before seeing that the construction sector has more than 100,000 employees, bank loans of 1.6 trillion MNT are for this sector, and 35,000 apartments are available in the market.”

Dulguun Bayarsaikhan

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