Moreover, the talk about stimulating lending in domestic currency is just talk unless backed by signals of a rate cut.
Adrian Vasilescu, who is seen as the voice of BNR governor Mugur Isarescu on the market, as he is his advisor, says there is absolutely no connection between consumer spending rebound and a rate cut, because the lending policy of banks does not necessarily take into account BNR’s decisions and bankers keep interests on loans up even though the inflation has significantly gone down.
“I find it odd to say that there is no connection between the key rate and consumer spending and I think we might be an exception. The National Bank is thinking more about how to defend the leu instead of how to stimulate the economy,” comments Radu Craciun, investment manager of Eureko Pensii and former banking analyst. “This strategy worked very well during the economic boom, but it is pointless now, when the economy needs to recover.”
On the other hand, a situation where banks do not react favorably to BNR’s signals is problematic for the central bank.
The rapid inflation decline, which reached an all time low of 3.45% last month, increases the central bank’s room to maneuver in terms of cutting the monetary policy rate, which would help the economy rebound through a drop in interests on leu loans and through stimulation of consumer spending.
The fear of inflation, which went beyond 8% after the VAT hike in mid 2010, made the BNR wait and see what happens, so that the monetary policy has stayed at 6.25% per annum for almost a year and a half.
Even though a key rate cut would not necessarily lead to cheaper loans for consumers right away, such a step would help the government borrow cheaper from banks, so that the economy would stand to benefit in the end.
“A monetary policy rate cut would help by lowering the borrowing cost for the government, which will also help the economy in the long run. Lending might not become cheaper because the monetary policy transmission channels stop working during crisis and cheap money only serves to boost banks’ margins,” believes financial analyst Florin Citu.
Businesspeople feel a key rate cut would help the economy rebound from the crisis faster.
“I don’t think that if the rate were cut now, consumer spending would miraculously rebound by Christmas, but I believe that if the economy were helped with lower interests, it could recover from the crisis faster and the consumer spending would pick up, too,” Szarvadi said.
Some analysts doubt the BNR’s courage to cut the key rate before the end of the year, given the fear of international turmoil, which has become even stronger over the past month.
“I don’t think the BNR will cut the rate before a solution to the sovereign debt crisis in the euro zone is found. The first monetary policy rate cut will most likely happen in the first quarter of next year,” says Dan Bucsa, chief economist of UniCredit Tiriac Bank.
There are also more optimistic scenarios about a first step towards a rate cut next month, when the last monetary policy meeting of the central bank for this year is scheduled.
“I believe the central bank will cut the key rate by 0.25% in its last meeting, considering the better than expected performance of the disinflation process and the widening of the spread between the inflationary and monetary policy rates. International turmoil is significant, but I don’t think it can be alleviated by keeping the key rate unchanged,” says Melania Hancila, Volksbank chief economist.
Ionut Dumitru, chief economist of Raiffeisen, also expects a cut of the minimum mandatory leu reserves, currently at 15% and says the rate cut might be supported by the fast decline in prices and by the deterioration of the economic prospects Europe-wide.
(English version by Loredana Fratila-Cristescu)