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December 9, 2021

Central Bank’s Isarescu intends to narrow interest corridor to avoid negative interest for deposits

The National Bank of Romania (BNR) is considering narrowing the corridor around the key interest rate in the coming period to counter inflationary pressures estimated for 2017, a move which would help avoid negative interest rates for deposits in Romania, and would also lead to cheaper loans, BNR Governor Mugur Isarescu said on Thursday.

In his opinion, such a decision cannot be considered a monetary policy tightening, but its recalibration.

“For now we do not have any significant change [in the monetary policy]. We will have details in May. In the meantime, also following the discussions with international financial institutions, a first step towards a narrowing of the interest rate corridor has been outlined. The significance is clear: we strengthen the signal power that the key interest rate must have. Meanwhile, until such a measure is taken, we will have to clarify, including with the public opinion, what other significance such a narrowing has,” said Isarescu, according to Agerpres.

The governor pointed out that certain analysts argue that such a narrowing would strengthen the monetary policy.

The governor acknowledged that an increase in the interest rate on the deposit facility, for example from the current 0.25pct to 0.5pct, could be considered strengthening. However, in the BNR opinion, this would be a clear signal that the institution opposes reaching negative interest rates on deposits in Romania.

Isarescu recalled the fact there is no deflation danger in Romania, given that both salaries and consumption are increasing, and there is only a transient negative inflation.

As to the upper part of the corridor, between the key interest rate and the Lombard rate, at which banks borrow money from the central bank, if the corridor remains symmetrical, a narrowing by 0.25 points means that the Lombard rate decreases by 3pct, which means cheaper loans.

Currently, the corridor around the key interest rate of 1.75pct is 1.5 percetange points. Thus, the interest rate on the deposit facility is 0.25pct, and the Lombard rate 3.25pct.

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