ECB lowers key rate to boost growth in eurozone

The European Central Bank (ECB) yesterday cut its key interest by a hefty half-point, from 3.25% to 2.75%, given the European economy’s increasing signs of stagnation.
European rates have thus hit a three-year low. Most European stock markets jumped by 1-2 percent in the minutes after the decision, but the euro sagged slightly against the dollar, maintaining below parity with the US currency.
Commercial banks are expected to follow the European Central Bank’s lead and cut rates as well, both for deposits and for credits.
Moreover, Romanian banks are also set to lower interests for euro-denominated deposits and loans.
“The decreasing trend of rates (for deposits and credits) is now a certainty. It is hard to predict the rate cuts pace. This is practically up to every bank and to their own policy,” said Dan Pascariu, chairman of HVB Bank Romania.
Romanian banks used to pay interests ranging between 0.25% and 4.5% for the deposits attracted from natural persons for one year. For the euro loans, the rates levied both for natural and for legal persons can go up to 6-15%. Romania features the area’s largest gap between credit and deposit rates.
The Romanian market has seen a surge of loans granted in euros or in the equivalent of euros. At the end of August, 30% of the loans granted by Romanian banks were based on euros. If banks decide to cut credit rates, especially for the leasing contracts, this would take some of the pressure off debtors, as the ROL/EUR exchange rate has soared this year, exceeding 20%. The ROL/USD exchange rate has only gained 6%.
Bogdan Baltazar, chairman of BRD (Romania’s second-largest bank), says he is considering a rate cut. More than that, he says BRD will probably cut rates by 1-2 points for the ROL credits.
The rate cut by ECB, which has been widely anticipated, came after mounting pressure – both inside and outside the bank – to ignore concerns over high inflation and focus instead on lower borrowing costs to encourage spending by business and consumers.
Speculation of a rate cut has been rampant after the ECB disappointed the markets last month by not following the lead of the United States’ Federal Reserve, which cut its key rate by half a percentage point, from 1.75% to 1.25%.
“This was almost a moral duty for Duisenberg (i.e. ECB president) to cut the rates,” says Alberto Marinelli, who manages funds worth 450 million euros in Milan. “He had to follow the Fed’s lead.”