"Even a nephew of mine realised he had made a bad deal by taking out a consumer loan at an interest that was actually 48%, after coming to me to brag about how little he was supposed to pay." Since three years ago when Romanians discovered the consumer loan through today, when NBR has taken steps to improve the banks'' transparency, the situation described has remained almost the same, especially because this time the story comes from the central bank governor Mugur Isarescu himself. Interests have gone down meanwhile, but the mentality of the banks'' customers has not changed much.
Isarescu criticised again the Romanians'' appetite for plunging into consumer loans headfirst, getting completely disadvantageous terms as far as costs are concerned, due to the lack of practice in dealing with banks.
"Profits across the banking system are being made from consumer credits at the moment," Isarescu commented, after having spoken this spring about the potential of this market being drained and urging banks to credit companies or take to rural areas.
The profit margins are so high that banks can afford to continue the rate cutting war despite restrictive measures adopted by the NBR. The efficiency of such measures can again be called into question, as right after the introduction of the decision to make foreign currency lending more expensive, a significant retail bank launched a campaign promoting exactly this type of loan.
Until the end of August, when the new norms for containing credit risk are due to enforce, the National Bank is again thinking of restricting demand as a solution to offset the inflationary pressures. There are not many options at hand and all of them come with costs, which makes the choice even harder.
"What can the NBR do with scheduled inflation? Restrict demand. But how? Attack the credit or boost savings. Only that doesn''t happen with advice but with higher interest rates." This is what part of NBR''s dilemmas look like, as summarised by Mugur Isarescu.
Subsequently the question arises whether the interest is an instrument that can be used in this situation. Whether the NBR can afford the negative consequences of a rise in rates, for the sake of success in curbing inflation and attaining the target commitments. The governor has an answer to this, yet each answer brings along a question: "With the opening of the capital account, the rate increase would draw in more foreign capital, which would put an even heavier pressure on the appreciation of the RON. It is true the appreciation would help loosen up inflation a bit, but how sustainable is a massive appreciation for the economy?" Mugur Isarescu says.
The idea of rising interests to reduce consumption demand fuelled by credits and to redirect some money from consumption to savings resurfaces given that the NBR has almost nothing left to do in the battle with inflation; circumstances growing more and more unfavourable, as adding to the petroleum price maintaining high, the recent disastrous floods are already driving produce prices up, which were actually expected to go down.
"What prices can we push down? The increase in controlled prices is scheduled. Then the service prices will keep going up, tending to rally to those in Europe and contributing 2 or 3% to the inflation a year. If we can''t touch prices, then we can only reduce the aggregate demand to attain the inflation target. At what costs, though?" Isarescu wonders again. razvan.voican@zf.ro
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