The interest rate on dollars is going up. Timidly, by just a quarter-point, this comes after four years in which it reached an all time low of 1%. However, analysts are saying that this signals the beginning of a trend that will hold for a longer period.
One certainty is that one can only talk about an increase in the cost of funding in the American currency from now on.
The very low level of interest rates on loans in dollars, however, leaves enough room for the dollar to beat the ROL when it comes to picking the currency one's loan should be denominated in.
This April, the Romanian banks were charging an average 9% a year for loans in dollars granted to individuals, down from the 10% at the end of last year. Corporate clients were required to pay about 4.3% a year compared with 6.6% in December 2003. By contrast, interest rates for ROL loans reached 27.4% for individuals, still visibly higher than last year and 24.8% for companies, a slight reduction.
According to expectations on the foreign markets, the benchmark interest rate on USD could reach 2.25% by the end of the year and 3.5% by the end of 2005.
Under the circumstances, credit in dollars stands every chance of maintaining its status as the cheapest credit available, while deposits in the American currency will continue to provide the lowest yields for some time to come. April data shows that USD deposits yielded only 1.7% a year in the case of individuals and 1.1% for corporate clients.
The markets had seen this increase in the benchmark interest rate in the US coming.
"The fluctuation is much too low to be talking about a change in the preference for credit in dollars in the short run. In the event of other rate increases following, accompanied by the continuation of the decline in ROL credit interest, it would take about a year from now to see a shift towards the lending in ROL," commented Radu Craciun, senior analyst with ABN Amro Bank Romania.
He says the 9%-10% interest-rate gap between credit in ROL and USD is too wide to narrow to such an extent that it would stimulate lending in the domestic currency.
Radu Craciun feels the appetite for speculative USD credits will also continue during July-September 2004.
The impact of the Fed's decision on the EUR/USD exchange rate was practically none, considering the market had already seen it coming and had 'included it in the price'. Any increase in interest rates over the next six to twelve months can be expected to favour the dollar. This means the ROL could lose ground against the dollar, after a long period of minor fluctuations keeping within a rather narrow band. The ROL has lost 2.4% against the dollar since the beginning of the year, but actually gained 0.3% if compared with the corresponding period of 2003.
BRD analyst Florian Libocor sees a similarity between these moves by the Federal Reserve and the National Bank of Romania, viewing them as a cautious signal indicating the start of a trend.
"Assuming the two trends maintain a relatively constant pace, I don't think we could see credit in dollars becoming less attractive any sooner than the end of this year. At the same time, I don't think we'll see a spectacular rebound on the part of the American currency, particularly because of the high deficits," Libocor suggested.
This all suggests that the dollar will retain the lending crown in Romania for quite some time.
The United States Federal Reserve yesterday raised interest rates by a quarter point to 1.25%, the first increase in more than four years.
razvan.voican@zf.ro
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