The key rate cut from 3.25% to the all-time low of 3% came with a reduction of the minimum reserve ratio for leu-denominated deposits to 10%, as well as a narrowing of the symmetrical corridor of interest rates on the central bank’s standing facilities around the policy rate.
“We cannot remain cut-off from what is going on in Europe and around us and are now taking more steps that we did in the past, by looking not only at the trend of inflation and domestic economic indicators but also at the trends in Europe,” central bank governor Mugur Isarescu said at the media briefing after the monetary policy meeting.
“I can confirm the developments in Europe have a greater influence on us now. Keeping a disproportionate gap between interest rates in Romania and those in the neighboring countries is risky.”
The central bank governor, who had repeatedly expressed hope that total lending would be in positive territory, possibly this summer, is now saying that he is not happy with the pace at which banks grant loans and with how they approach their customers. However, he does not see the lending bet as lost, considering leu-denominated loans are on the rise.
The real dynamics of total non-government credit (domestic and foreign currencies) continued to post negative readings, also on the back of stepped-up operations to remove non-performing loans from credit institutions’ balance sheets, the governor says.
“Leu lending has increased fast but the foreign currency lending is seeing a significant decline partly because of portfolio cleanup. I don’t think BNR lost the bet. (…) We are keeping our word and cutting the minimum required reserves on leu-denominated deposits. Yet the loan to deposit ratio has dropped below one. Banks are not granting enough loans to cover deposits. When will lending increase? It won’t do it in a single day. Gradually. We’re talking about a change of attitude here, about mutual trust and about more accurate communication. I think banks should treat good and bad customers differently and help their good customers, be closer to them. It’s in their best interest.”
Domestic currency lending saw a faster pace of increase in real terms, amid lower lending rates on new business to companies and households as a result of the pass-through of policy rate signals, the central bank notes.
In order to establish favorable prerequisites for the sustainable recovery of lending and to continue the harmonization of the reserve requirements mechanism with the standards and practices in the field pursued by the European Central Bank and the major central banks of EU member states, Romania’s central bank board decided to cut the minimum reserve requirements ratio on leu-denominated liabilities of credit institutions to 10% from 12%.
The future central bank board will continue the gradual lowering of the minimum reserve requirements for leu and foreign currency-denominated liabilities without affecting the foreign currency reserve, Isarescu said. It will, however “most carefully” analyze any future cut of the key rate, considering the uncertainty of the long-term inflation trend.
“As we are not sure the inflation will stay low a la longue, I think the future board will most carefully adopt any decisions to cut the key rate,” Isarescu said.
The annual inflation rate stood at 0.84% in August, down from 0.95% a month earlier.
(English version by Loredana Fratila-Cristescu)