For years now, the Romanian National Bank (BNR), Governor Mugur Isarescu, has been trying to direct Romanians towards borrowing in the local currency.
The problem is that the inflation rate is high, nearly twice as high as the rate anticipated by the central bank that hopes for a reduction to 4 per cent only in September. In order to raise money from Romanians, banks keep deposit interest rates high, the consequence being that the interest charged for money they lend is also kept high.
Although BNR’s key-interest rate is 6.25 per cent per year, commercial banks charge a rough interest of 12 per cent per year for loans in RON.
BNR has recently sent an optimistic signal, as we were noting above. Governor Mugur Isarescu says the consumer price index might soon drop by a half and we may record an inflation rate of ‘4 per cent plus a little something’ at the beginning of October (from the 7.9 per cent in June).
The governor also pointed out that another possibility of inflation evolution in the upcoming period could be minor monthly rises of 0.2 per cent, without including foreign shocks or a too high volatility. In this particular scenario, the annual inflation rate could be above 4 per cent.
‘A few more pessimistic analysts will say the National Bank has been helped by potatoes, other will say by vegetables and some others will say inflation will come back. Many different comments are possible. The thing is not to jump from one extreme to the other,’ said the governor.
On the other hand, the central bank chief notes there are still a few issues of substance with regard to inflation which need to be dealt with, starting with heat tariffs which are due to go up this autumn. Isarescu explained that the scrapping of the heating subsidy for the entire population would have a contribution of 0.7 – 0.8 per cent in the CPI.
As a result of that, the interest rates for loans in RON are much higher than the key-interest rate of 6.25 per cent, yet they may drop towards that level in the next period if the banks are confident, BNR Governor Mugur Isarescu said last week. ‘I expect interest rates for RON credit – retail and corporate alike – to decrease towards our rate in the next period, if they are confident to do that. It is all a question of trust,’ Isarescu said.
He showed that commercial banks keep the interest rate for loans in the local currency at a level which is the double of the key-interest rate now of 6.25 per cent. ‘They keep credit interest rates much above our interest rate and, meanwhile, they appear in the press to explain that the National Bank is not fostering borrowing in RON,’ Isarescu said. The governor added that one possible explanation for the situation is that the banks did not believe the inflation issue could be overcome.
‘I believe there are two reasons. They were not confident that the issue of inflation would be overcome – and they had all the reasons not to – and the market is inhomogeneous and fragmented,’ Isarescu also said.
On the other hand, the governor says foreign developments have so far had a minor effect on the exchange rate and that any bigger consequences can be expected only ‘if we get scared and introduce our anxiety to the market behaviour’. ‘The exchange rate is also tied to what comes from abroad. That is first visible in the risk premium and then in the exchange rate. So far, the impact has been minor and we see no reason why it should become bigger, unless we get scared and introduce our anxiety to market behaviour,’ Isarescu said during the same inflation seminar.
Isarescu noted that, compared to other currencies governed by more or less controlled floating policies, nothing extraordinary is happening with the national currency and the concern about an alleged intervention by BNR on forex rates is ‘false’.
‘I don’t see what we would have gained, as a country, from having a greater volatility of the exchange rate during a period of crisis. When the national currency depreciates we panic, our head starts shaking, we pull our hair out in front of the TV and when it finally starts appreciating we still cannot come back from that state and we suspect something wrong,’ the governor said.
Seen from the bankers’ stand point, the situation looks in the following way: while, before the crisis, the banks had access to cheap money on the foreign market and were thus able to lend on to company and population more easily, now the situation has changed. Available resources on the foreign markets are scarce and many banks have come to depend on Romanians’ money.
