Interest rates post lowest levets in years

During the last three months, banking interest rates, for deposits as well as credits, have posted a steep fall, by 3-4 percent each month, signalling potential economic recovery. However, analysts and officials consider that the above-mentioned evolution is most likely ephemeral, artificially induced, so that by the end of the year interests should jump again.

Interests for deposits of non-banking customers in July reached about 32 percent, dropping at a slower pace than interests for other credits, whose average came, according to the latest reports issued by the National Bank, to 57 percent in May, while in June and July they stood at about 50-53 percent, according to banking sources.

“I think this is as low as interest rates can go, and this drop is ephemeral, a typical summer phenomenon. Now interest rates are going down. The main cause behind this evolution is over-liquidity on the monetary market. The National Bank bought a very high volume of foreign currency last year, for debt servicing, and it did the same this year, too, injecting lei into the market,” a foreign bank dealer maintains.

“Interests will surely not be pushed too low, because we tend to have a negative outlook. That is, if we cut down interests too much, we no longer make the domestic currency attractive, which may be inconvenient, as investors might shift focus towards the dollar. It is certain however that interest rates will stay positive, somewhere around 38 percent, until the end of this year,” says Enache Jiru, CEC (Savings Bank) deputy chairman.

If NBR accepted it, interest rates for over-night deposits, for instance, might decrease bellow a 20% level. It would be enough for NBR to stop attracting lei from the market. However, it is obvious that, as long as expected inflation is around 32-34%, interests cannot go lower than the inflation rate.

Undoubtedly, interest rates for treasury bills will go back to 40-45% in autumn, following inflation, which will be higher in its turn due to the drought, authorities state. “We are counting on a real appreciation of the exchange rate for this year, I mean we expect the dollar to outrun inflation,” the dealer added.

When they defined the economic programme for this year, Romanian officials insisted on leu’s depreciation following inflation, but the euro’s current depreciation against the dollar makes Romanian exports unprofitable, as they are mostly aimed at European countries. Since the euro is not directly quoted in Romania, but on international markets, pressures will be made on the leu-dollar exchange rate, so that the euro’s depreciation might be recouped and exports become competitive, analysts say.

Officials within the Finance Ministry (MF) say the Government should insist more on cutting down interests MF has to pay when taking over losses from institutions such as Bancorex and Banca Agricola.

“We are now at a point where payments on interest rates levied on losses taken over as T-bills from the two banks amount to one quarter from the value of these losses,” official sources say. The Finance Ministry has to pay interests between 60-70% for part of Bancorex bonds taken over at the end of last year, also because it currently cannot afford to redeem them in advance. Aron Racea, MF advisor on Treasury issues, believes that for the time being NBR and the Government do not have a coherent strategy to sustain the cut in interest rates. “Unfortunately, banks are still unwilling to credit the real economy, which triggers an inverted effect whose main consequences will probably be noticed this winter: a jump in inflation accompanied by interest rates curbing will be seen at the end of the year, when they will most likely exceed current estimations,” he said.

“We would resort to credits if they had kind interests, of 1-2 percent above the inflation rate, and not criminal as they are now, that is double the inflation rate,” Sterian Negoitescu, manager of Magnum consultancy, considers.