The Romanian central bank (BNR) decided on Thursday to keep unchanged both the key interest rate, which has been set at 6.25% for the last 16 months, and the minimum reserve requirements, preferring not to give signals to encourage lending and support the fragile economic growth.
Analysts anticipated that the central bank would take a wait-and-see approach until the external situation settles down somewhat, but businesspeople queried by ZF asked the central bank to cut the key interest rate in order to give a signal meant to stimulate the economy by encouraging lending in lei.
“The central bank decision to keep both the key rate and the minimum reserve requirements unchanged in fact means a strengthening of the monetary policy, considering that inflation has fallen abruptly lately and that the excess liquidity on the market has dwindled considerably. This has also been reflected in the increase of interbank interests in the last few months and in the lower financing offering available for the state treasury,” commented Melania Hancila, chief economist of Volksbank.
The economy badly needs to cut its financing costs in order to retain its competitiveness on external markets, at a time when mature economies offer extremely low interests precisely in order to stimulate lending in the real economy and economic growth, implicitly.
“The cut in the monetary policy rate would also have beneficial effects on the external public debt and on the budget deficit, because it would cut the rates at which the Finance Ministry borrows,” added Hancila.
The central bank notes that that the resumption of economic growth continued “at a slower pace,” amid a worsening of the global risk appetite and the global perspectives of economic growth, and admits that “the revival of loans granted in the private sector, especially of loans in Romanian currency, remains modest.”
However, the central bank expects “the slowdown of the recovery of the Romanian economy to be temporarily offset by agricultural performance in the second part of this year.”
Next year’s prospects are, nevertheless, worrisome. Entrepreneurs expected the central bank to give an encouraging signal this time, considering that hopes for the economy to rebound next year have suddenly faded because of the worsening of the situation in the euro zone.
Although the prospects are of consolidated disinflation, the central bank believes there are still uncertainties related to external evolutions, capital flows, trends of administered prices, as well as volatile prices.
“So, the central bank will gradually adjust its monetary policy in line with these developments and if the Romanian authorities meet their commitments as part of the financing agreements sealed with international institutions,” reads the detailed release made after the monetary policy meeting.
Florentina Cozmanca, RBS Bank economist, recalls that pressures on the exchange rate have continued to be high and have an unfavorable impact on inflation and on financial stability, which justifies the central bank’s prudent attitude.
In theory, a cut of the key interest rate would have a negative impact on the exchange rate.
Central bank officials have explained on several occasions their reluctance to reduce the key interest rate by the risk of encouraging exchange rate speculations against the leu, saying the measure would not have significant effects on loan interest rates.
The central bank believes that by ensuring price stability at the same time as maintaining financial stability, one creates the conditions for an enduring reduction in the cost of leu-denominated loans, which the central bank “encourages.”
(English version by Daniela Stoican)