Dr. Lucian Anghel Chief Economist, Banca Comerciala Romana
As a Nobel laureate in Physics, Niels Bohr used to say “prediction is very difficult, especially about the future.” However, in the midst of these turbulent economic times when almost nothing is certain, I would dare to make a clear forecast for the near future: leu interest rates will decline further in small steps, mirroring the disinflation process and the monetary policy easing cycle already joined by the central bank. Of course, there might be some delays in the monetary policy transmission mechanism, some imperfections in the money market and some strategic decisions of some banks that could make this downward trend not very constant all the time, but over the next three to six months I definitely see lower and lower interest rates. And I am not speaking here only about money market rates, but also about interest rates for households’ deposits and, the most important, for corporate and retail loans.
At least on the interbank market, the downward trend of the interest rates will slow down in the second part of this year as compared to the first six months, when they managed to decrease from above 14% to around 9%. In line with a gradual decrease in the interest rates for deposits, we might see a greater focus of the clients upon term deposits at the expense of saving accounts. Using specific promotions, banks will continue to offer attractive real positive interest rates for households and for the first time in the last years deposits might increase faster than loans, a key element in increasing the saving rate and correcting the external macroeconomic imbalances.
Inflation rate embarked on a downward trend beginning with the second quarter following the contraction of the aggregate demand but not necessary an increase in labour productivity. Lower leu volatility after the agreement with the IMF and EU also played a role in this disinflation process. Among the risks in the short run, the evolution of the oil price on international markets, the correlation between wages and productivity and the domestic political situation with further effects upon leu exchange rate are worth mentioning. At the same time, an increase in indirect taxes might result in a higher inflation rate, although such a decision is inconsistent with Romania’s present needs in my opinion. Macroeconomic imbalances are adjusting very fast nowadays, some of them like the current account deficit even faster than initially expected. This is good news, but at the same time we must recognize that Romanian economy still has a long way towards Euro Zone standards: labour productivity in industry is still low and has shown only tentative signs of improvement since the beginning of 2009, market imperfections in the price setting mechanisms are still present despite the important drop in households’ consumption and companies’ investments, young unemployment rate is above EU average and remains an issue given the rigidities of the labour market. It remains to be seen if the current disinflation process will be long-lived and if Romania will be able to increase the supply side of the economy, lowering the dependence upon imports.
Central bank has already took specific actions for supporting the economy as inflation rate began to decrease, real GDP contraction worsened and fiscal policy turned stricter in the aftermath of the joint agreement with IMF and EU. Key rate was cut in more steps, minimum reserve requirements for leu and foreign exchange liabilities of credit institutions were reduced, open market transactions became more frequent with a view of increasing the liquidity of the money market. At the same time, central bank sent more messages regarding the accurate level of real interest rates which should not exceed 3%, a correct level in my opinion under the present circumstances. All these should finally determine a downward trend of leu interest rates in the next months, mirroring further cuts in the key rate to around 7-8% at end of the year. Meanwhile, Romania’s most important task remains the fulfilment of the IMF and EU requirements, a challenging aspect in an election year and a key element in safeguarding the economic stability in the long run.