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

The European Central Bank (ECB) gave the signal foreuro-denominated loans to become more expensive yesterday byraising 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, withalmost two thirds of loans granted to individuals and companiesbeing euro-denominated.

For instance, a client with a 40,000-euro loan that extends over30 years used to pay a monthly instalment of 230 euros amid aninterest of 5.75% a year. If the interest climbs to 6% a year, theinstalment reaches 240 euros.

Euro lending becomes more expensive at a time when the Romanianeconomy is struggling to come out of an over two year-longrecession, but local economists say the impact will not bedramatic.

"Overall, I don't think the impact of the ECB decision will bebeneficial to Romania's recovery from recession, but I think interms of size it will be marginal. In theory, raising the interestmakes investments more expensive and saving more attractive.Romania needs investments, but it also needs to save," says FlorianLibocor, chief-economist of BRD-SocGen. He says he is consideringimproving this year's economic growth forecast to 1.5% from 1.2% atpresent, with the decision being based on expectations of a betterabsorption of EU funds.

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