Repo and 1% cut to policy rate announced to ease lending

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Mongol Bank’s Monetary Policy Committee issued to further slash the policy rate by one percentage point to 8 percent and introduce repurchase agreement (repo) to the market.

These decisions are expected to increase loan supply to the market and allow banks to lower loan interest rates.

“The Monetary Policy Committee considered the current economic and financial situation, future outlook, internal and external climate, and risks when making this decision. These decisions will increase the amount of loans provided by commercial banks to the market as well as support economic recovery. We view that ensuring a reasonable policy rate reduction will facilitate the loan interest rate reduction strategy, approved in August 2020,” stated Deputy President of Mongol Bank G.Enkhtaivan.

Member of the Monetary Policy Committee Ts.Munkhbayar explained, “The balance of payments pressure has improved. The most important factor in changing the policy rate is the external sector environment or pressures on the balance of payments. Foreign direct and portfolio investment has improved since the previous meeting. Second, foreign exchange reserves are expected to increase. Third, exports are expected to outpace imports. In particular, coal and copper prices are expected to remain stable to ensure balance of payments stability, albeit slightly. Therefore, the committee agreed to cut down the policy rate by one percentage point.”

Repo is a financing instrument of short-term borrowing for dealers in government securities. In other words, it allows an individual to sell securities to another under the condition that it is sold back after a specific period, usually on an overnight basis, at a slightly higher price. Repos are not only flexible but also provide the ability to invest cash overnight, making them a critical component in the effort to manage liquidity. They generally provide additional yield as compared to traditional money market instruments, such as treasury bills, time deposits and discount notes. However, they are subject to counterparty risks as the counterparty would take possession of the collateral if the seller fails to meets repo conditions. 

As of August 2020, the annual inflation rate dropped to 2.1 percent in Mongolia and 1.7 percent in Ulaanbaatar. The committee forecasts inflation to see a moderate increase in coming months, but not as much as to exceed the target rate in the next couple of years. COVID-19 has become a major hurdle for the Mongolian economy and elsewhere this year, with impacts more dire than expectations. For example, the Mongolian GDP contracted by 9.7 percent in the first half of the year, a rate observed for the first time in two decades. However, Mongol Bank remains optimistic. 

“Thanks to the monetary and fiscal policy measures in place and the recovery of the external environment, the economic downturn is expected to subside in the second half of this year and the economy will likely recover next year,” G.Enkhtaivan noted.  “After the global economic downturn in the first half of the year, we expect a rebound and the economy to stabilize in the third quarter. It is fully reflected in the stock market price, mineral prices and trade activity. However, uncertainties remain due to COVID-19.”

Mongolia is currently taking progressive measures to minimize negative impacts of the pandemic, implementing monetary and macroeconomic policies to subdue economic downturn, and using Mongol Bank’s policy instruments to stabilize the banking sector. Through monetary and macro-prudential policies, officials are working to support the liquidity of banks, families and businesses, while taking steps to prevent credit disruptions in the banking system. Measures are in place to support investments and household income and stimulate economic activity.

Dulguun Bayarsaikhan