National Bank bucks market trend with monetary policy rate

The Board of Governors of the National Bank of Romania has decided to bring a halt to its policy of interest rate cuts, deciding instead at a meeting earlier this month to keep the yearly rate at 12.5%, NBR Governor Mugur Isarescu said yesterday.

“We were not able to validate the massive rate cutting on the market, so we decided to wait. We know the market can make mistakes and if we have doubts about its judgement then we take steps to defend ourselves,” Isarescu said.

He also talked of the stabilisation of the interest rate at a level at which the central bank attracts liquidity from the monetary market. “We also stopped reducing the purging rate. Had we acted by following the market, it would have gone down further still, but we had to consolidate the signal sent out by preserving the monetary policy rate.”

He reiterated that the NBR believed “interest rates on deposits have gone down too much”, saying that market rates need to link up with the NBR monetary policy rate again, meaning a slight increase.

There have already been signs of an increase in rates for government securities by more than one percent for three and five-year maturities, compared with rates in March. Isarescu says the NBR stopped its monetary policy rate curbing at 12.5% precisely because it did not want to risk having to increase the rate again.

Things have now come to a point where commercial banks are offering rates for deposits much lower than at the beginning of the year, with the reduction being even faster than the decline in the case of loans. Lenders are now paying 6 to 9.7% a year for deposits due in one month or up to one year. “The central bank can go against the market judgement, if it believes it to be incorrect. I find cutting rates on the market risky,” Isarescu explained.

The NBR Governor believes the banks will be deluding themselves if they continue with the hope of making lots of money off the spreads between rates on loans and rates on deposits.

“Banks have no option other than to cut rates heavily for loans in ROL. Only those who deal in large volumes will win the market,” he said, explaining that the banks will be making money from retail until this segment reaches saturation, given that some of the population have already reached the maximum indebtedness ceiling.

On the other hand, the head of the central bank said interest rates had not become negative in real terms because income from savings needs to be judged by taking both inflation forecasts and previous inflation figures into account.

As to inflation, Isarescu admitted that the NBR “was wrong” to estimate the impact of the increase in the controlled prices on inflation for April.

“We definitely see inflation at more than 1.5% for April. Our initial estimate was for just above 1%.”

The National Statistics Institute is scheduled to announce the official figures today. Sources quoted by Mediafax say inflation will be 1.9%, pushing inflation for the last twelve months to 10%. razvan.voican@zf.ro