“It appears that the BNR analyzes changing its aproach on the monetary policy considering that inflation is declining. If inflation stays below 5% and even towards 4% in August and September, BNR will make some cuts to adjust to the new conditions,” said a banking source.
This is the first time since May 2010 when the central bank wants to relax the monetary policy that it has been keeping a tight rein on since the VAT hike in July 2010, which caused inflation to double in the past year. The annual inflation surged in the first part of this year, to over 8%, much higher than the central bank’s target. Besides the VAT hike, inflation was kept above 8% by the food price increase.
Only in July, the annual rate fell to 4.8% after the effect of the VAT hike wore off and as a result of cheaper farming products thanks to the good harvest.
If inflation falls towards 4% but the monetary policy rate stays at 6.25%, then one could said the central bank has a tight monetary policy, which should be somewhat relaxed, added the quoted source.
The monetary policy rate has been frozen at 6.25% for the last 15 months, while the minimum leu reserve requirements stood at 15% since July 2009. The minimum reserves, which are the most powerful instrument of monetary policy, are the amounts that need to be kept by commercial lenders into their accounts at the central bank out of the overall deposits attracted.
The release of several billion lei from the reserves will force bankers to find private clients for loans in the Romanian currency and to cut interests.
Lately, amid renewed turmoil on international markets, local analysts raised the issue of the BNR strengthening its monetary policy in order to keep money within the Romanian borders.
If banks have extra lei but do not wish to take on the risk of lending, can they not exchange lei for foreign currency and repatriate some of the loans granted by parent banks?
“If they want to repatriate the money, they might not fulfill criteria of prudence, liquidity and solvency, considering that the pressure of non-performing loans is still high,” said the cited source.
The Romanian economy is heavily dependent on the euro, especially when it comes to loans granted, while recent tensions on European markets putting pressure on euro financing sources.
Under the circumstances, BNR is seeking to turn the market’s attention towards the Romanian currency, but in order to do that, banks need to cut interests on loans, so that they become more competitive against euro-denominated loans.
(English version by Daniela Stoican; Editing by Loredana Fratila-Cristescu)