The board of the National Bank yesterday announced a cut in the intervention interest by 0.5% to 20.75% a year.
Performed one week later than the market had expected, this decision shows nothing but the utmost caution. NBR this way answers the expectations created by the decline in inflation, but remains wary of macroeconomic slippage risks that may arise from the boom in consumer demand.
"Overall demand and imports kept going up at a fast rate, which is likely to generate risks for the disinflation process and for foreign accounts," reads a NBR Board release announcing the decision.
The 0.5% lower interest rate does not narrow the striking gap compared to the level of inflation (12.5% annual rate) but signals to the market the start of a trend to narrow the gap between these two indicators.
Bankers agree that in case of a gradualist, step-by-step strategy, the intervention interest-rate cut cannot have repercussions through noticeable changes to the market rates, unless the successive interest-rate reductions reach 1.5-2 percentage points in total.
The main question now is when to expect the second step to consolidate this trend in the making. Only then could the banks resort to adjustments on the interests on loans and deposits. And while caught in the rush for new business, some might even risk anticipating what the central bank is going to do next.
One cannot ignore the risk of this downward trend stalling at some point, if inflationary pressure develops as a result of the consumption boom, possibly early this autumn.
After all, the National Bank on Monday restated its commitment "to keep the monetary policy within the necessary parameters to attain the 9% inflation target for this year and the 6% target for 2005."
Under normal circumstances, interest-rates could go down as low as 17-18% at the end of year, without greatly affecting the attractiveness of foreign currency lending. Forecasts for August point towards a level of 20%. As long as the signals of an economy overheating do not become inflationary pressures, the NBR could make as many as two reductions to the interest-rate in one month, but it is highly unlikely it will risk having to revoke these cuts, in case it turns out it rushed to perform them.
Even at 17-18% late this year, interest rates would still be pitched higher than inflation, attracting possible inflows of speculative capital that still manage to slip by, despite the fact that the NBR has postponed the last step of the capital account deregulation, that is allowing deposits in ROL by non-residents.
NBR announced the new interest-rate on Monday right before the start of the interbank market session.
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