Effective rate up, nominal rate down

The central bank has increased the intervention rate on Monday, when it absorbed the banks’ entire excess liquidity at a fixed interest rate of 7%, even though the monetary policy interest rate remained at 7% per year for the fourth consecutive month, following Wednesday’s meeting of the NBR’s Board of Governors (NBR – National Bank of Romania).
The effective interest rate used by the central bank in market operations had not acted as the monetary policy rate over the last few months, therefore the nominal rate was able to remain unchanged even though the effective rate increased, and the NBR does not run the risk of appearing too concerned over the inflationary pressures cumulated over the last period.
“The relevance of the monetary policy rate as a reference rate has disappeared due to the inconsistency of the NBR and the Ministry of Economy and Finance, which have undoubtedly set the tone for the market. Things change from one day to the next. The NBR should keep the interest rate at the same level as the monetary policy rate, but in fact there were major fluctuations from one week to another, far below the reference rate. If the Ministry of Finance gets upset, it might abruptly stop taking money from the market, because it doesn’t like the price,” says Misu Negritoiu (photo), general manager of ING Bank Romania.
Analysts say what the NBR did on Wednesday was merely confirm Monday’s full purging move, by returning to “firm liquidity control”, as compared with the “adequate control” of the previous months, which in fact meant absorbing liquidity at variable interest rates, most of the time below the monetary policy rate.