Why did borrowing costs remain high?

Borrowing costs remained high throughout the summer, lenders showing timid rate-cutting attempts, despite the NBR governor’s estimates that Romanians would find better lending terms as they return from their summer vacation. Economists interviewed by Wall-Street expect interest rates to continue dropping, but at a different pace compared to deposit rates.

Lending rates adjusted slower than deposit rates

Lending rates and deposit rates practiced by commercial banks “will follow the same downward trend as the current account gap”, and Romanian borrowers will have the surprise of finding lower rates when they return from their summer vacation” NBR governor, Mugur Isarescu said in July.

Economists say fixed-deposit rates were cut, but probably not as much as the governor had expected.

As for the lending rates, things get more complicated, but analysts say there still a long time to wait to see a real reduction of interests.

“Deposits interest rates fell significantly, as the previous level was not normal. Interest rates for classic deposits in lei cannot be above the monetary policy rate. We shall see commercial banks cutting deposit rates further, until they reach a level below NBR’s benchmark rate”, Ionut Dumitru, Raiffeisen Bank’s senior economist told Wall-Street.

NBR’s monetary policy rate is currently standing at 8.5% while the highest deposit annual interest for a classic six-month deposit in lei is 11.5%.

“In general, deposit rates fell more rapidly than lending rates. There is a certain gap in the evolution of deposit and lending rates. When deposit rates stabilize, lending rates will be cut further”, Raiffeisen’s economist added.

NBR governor also said in July that “under current borrowing terms, it’s clearly we cannot have a credit demand”.

Interests for Fx loans dropped in the 12 months to June 2009 by less than 0.5basis points, while the six-month EURIBOR fell 4 basis points.

Still room to maneuver on interest rates

“Deposit interest rates have significantly adjusted, and I expect commercial banks to cut them further, as long as the monetary policy rate will continue to drop”, Catalina Molnar, RBS Romania’s senior analyst told Wall-Street.

Deposit rates dropped more rapidly due to the cash flow into the money market from the central bank’s coffers, stabilizing the cash flow in the banking system while reducing monetary policy rate from 10.25% at the beginning of the year, to a current 8.5%.

“There is still room to maneuver on both lending and deposit interest rates”, RBS’ analysts concluded.

Commercial banks that cut lending rates

In September, Libra Bank has cut lending rates for loans in euro by 0.75 basis points, both for existent and new clients.

In August, Millennium Bank reduced mortgage and secured personal loan rates by 3.5bp.

Intesa Sanpaolo Bank has brought significant changes in the bank’s lending strategy, by lowering rates by 4bp for unsecured personal loans and by 2.25bp for secured loans.

In mid summer, UniCredit Tiriac Bank cut its lending rates by 4.8bp, and simplified all loan application procedures.

Even Banca Comerciala Romana, the country’s biggest lender, eased its lending interests by 3bp, following NBR’s monetary policy actions.

However, lenders said a further lending rate cut was unlikely given the high deposit rates. Even though commercial banks have lowered deposit rates, savings accounts remained an extremely attractive investment venue.