The central bank is expected to announce today its decision by the monetary council on the future policies – sterilization interest rates and compulsory reserves on banks’ liabilities primarily. The sterilization interest rate was hiked to 8.5% on Feb. 8, while the compulsory reserves are 35% for Forex liabilities and 16% for local currency liabilities. The interest rates on the money market increased toward 8.5%, with the short [overnight] term rates featuring certain volatility. But the deposit interest rates remain below 8.5% while the lending interest rates stabilized. Lending rates for local currency loans are quite heterogeneous but they generally remain above 11.5% p.a. going up to above 20% p.a. for consumer loans. The next monetary council is scheduled for May 11.
IntelliNews Comment:
Regarding today’s decision of the central bank, a further hike in the sterilization policy may have a debatable impact on inflation while ringing the bell for foreign inflows. Stimulating disinflation by strengthening the local currency in nominal terms may be risky on medium term and costly for the central bank. BNR actually admitted recently that the sterilization costs increased quite a lot and this puts pressure on the quasi-fiscal deficit.
Further hikes in the compulsory reserves, particularly for foreign liabilities, may conversely ease the sterilization costs and put a floor on the lending interest rates. But the high lending interest rate has two different effects; first, they keep in principle the volume of loans from expanding rapidly, but also keep outside the banks’ interest investment projects with lower returns. Investments have increased at an encouraging rate of 13% last year [gross fix capital formation] from 10.8% in 2004, but the industrial activity fails to reflect those investments.