Big bankers under pressure to cut benchmark rates

Three of the world’s largest central banks – The Federal Reserve (Fed), the Bank of England and the European Central Bank are prepared to cut interest rates for the first time this year, in an attempt to put an end to the crisis symptoms visible in the western economies.
However, this measure is expected to have minimal effects on the Romanian financial market.
The rate cut to be enforced on the Western markets contradicts the recent decision of the National Bank of Romania, which opted for an increase of the minimal compulsory currency reserves in order to stifle lending in dollars, which still comes cheaper than ROL-denominated credits.
“Lending in USD or EUR, which is already cheap, will become even cheaper. It looks like the Fed forgot to tune its monetary policy measures to the NBR strategy this time,” Paul Prodan, head of ING Bank’s Financial Markets&Asset Management division told Ziarul Financiar.
On the financial markets, players are already banking on a quarter percentage point cut in the overnight cost of borrowing between U.S. banks, down to 1.5%. Similar cuts would push the rates down to three percent in the eurozone and to 3.75% in Great Britain.
According to Paul Prodan, currency lending on the Romanian market will become 5bp more expensive following the increase of the minimal compulsory reserves in USD and EUR, but this effect will be “neutralised” by the quarter point cut in the benchmark rates for these currencies.
The Fed will probably announce the rate cut tomorrow, with the Bank of England and the European Central Bank likely to approach this issue on Thursday. Ten days ago, no analyst ventured a forecast on a synchronised rate cut by the three big central banks. What has changed? The move was mainly prompted by evidence the global economy is slowing.
German business leaders were more pessimistic in October than at any time since the beginning of the year. U.S. consumer confidence, the most closely watched measure of economic health, plunged to a nine-year low last month, while unemployment is rising in France and the United States.
The Fed last cut the benchmark rates last year. Most economic analysts agree that steps must be taken so as to make lending more affordable on three of the world’s largest markets – the U.S., Great Britain and the eurozone, so as to bolster consumer spending and find ways to finance investments on the capital markets, which are not doing so well.
The rate cuts on the international markets will only be felt in Romania in the case of credits that are directly connected to the benchmark rates in the interbanking money markets such as LIBOR and EURIBOR. Still, there aren’t many credits of this type, says Claudiu Cercel, head of BRD (Romanian Development Bank) market operations division.