ECB gives signal for euro-denominated loans to become more expensive

The European Central Bank (ECB) gave the signal for euro-denominated loans to become more expensive yesterday by raising its key interest rate by a quarter of a percentage point, to 1.25% a year, reacting to accelerated inflation.

The decision will also impact the Romanian market directly, with almost two thirds of loans granted to individuals and companies being euro-denominated.

For instance, a client with a 40,000-euro loan that extends over 30 years used to pay a monthly instalment of 230 euros amid an interest of 5.75% a year. If the interest climbs to 6% a year, the instalment reaches 240 euros.

Euro lending becomes more expensive at a time when the Romanian economy is struggling to come out of an over two year-long recession, but local economists say the impact will not be dramatic.

"Overall, I don't think the impact of the ECB decision will be beneficial to Romania's recovery from recession, but I think in terms of size it will be marginal. In theory, raising the interest makes investments more expensive and saving more attractive. Romania needs investments, but it also needs to save," says Florian Libocor, chief-economist of BRD-SocGen. He says he is considering improving this year's economic growth forecast to 1.5% from 1.2% at present, with the decision being based on expectations of a better absorption of EU funds.

Players on international financial markets anticipated the decision, with three-month Euribor (the indicator that reflects the cost at which top-ranking banks lend to each other) yesterday reaching 1.28% a year, the highest level recorded since June 2009, from a 0.6% a year low in the spring of last year.