ECB raises interest rate

The European Central Bank yesterday upped the interest rate by 0.25% to 2.25%, which will immediately result in an increase in the costs of loans in euros on the Romanian market.

This is the first reference rate increase operated by the ECB in the last five years. Foreign analysts expect the ECB to raise the rate again early next year, to 2.5-2.75%, depending on how heavy inflationary pressures are.

On the Romanian market this increase will immediately be apparent in the costs of loans in euros, as the financial system has a very high exposure to the European currency. Bankers will most likely raise the prices of loans in euros much faster than they will raise the interest rates they pay on deposits in the European currency.

Out of the total credits contracted in Romania by the end of September, 53.3% were denominated or based in euros. Out of the total loans granted by lenders, worth 61.7bn RON (the equivalent of 17.1bn euros), the loans in euros amounted to 32.9bn RON (8bn euros), while 19.3bn RON was lent in RON (31.2% of the total) and 9.5bn RON in dollars (15.3%).

Still, following administrative measures by the National Bank of Romania regarding foreign currency lending in October, the balance of credits in foreign currency was lower than in the month before.

Funding in foreign currency went down by 0.1% (if calculated in euros), although such loans granted to the population continued to increase, albeit slower, by 0.9%.

The National Bank of Romania guidelines capping foreign currency lending came into force at the end of September and set a ceiling for credits in foreign currency, of 300 percent of a lender”s own funds.

Mihail Ion, the president of Raiffeisen Asset Management (RAM), says the effect of the higher interest on euros will be immediately apparent with regard to loans for companies and housing loans, whose price is based on the EURIBOR reference rate.

There are also special fixed-interest products on the market, such as forfeiting products, with banks having to bear the increase in related costs.

“Many banks get funding in euros at a variable interest rate. Some of them will probably attempt to internalise this cost increase through a higher lending volume, while others will certainly transfer the costs to customers,” Mihail Ion says.

The most affected of all could be retail clients, who signed credit contracts that come with adjustable interest rates, which banks can modify as they please.

What will follow this decision on the part of the ECB?

“I believe we can only expect a moderate increase of the euro rate, so as to keep inflation close to 2%, given that the eurozone economy cannot seem to find resources for faster growth, and unemployment remains high,” RAM”s president commented.

“The decision was long due and, as far as I am concerned, even delayed. Still, I think the effect will be attenuated by the market strategies developed and already implemented, given the extent of shopping, due to the seasonal behaviour that is specific to the end of the year,” commented financial analyst Florian Libocor. He believes the ECB”s move can also be expected to show in other economies, which are heavily using the euro currency.

andreea.paun@zf.ro