Friday, October 24, 2008

Romania battles money market rate spike

BUCHAREST, Oct 23 (Reuters) - Romania's central bank urged commercial banks to bring down the cost of short-term cash on Thursday and threatened to stop calculating indicative rates if interbank lending rates remain high.

In a statement released late in the day, the bank said the spike in money market rates was "temporary and isolated" and urged banks to "return to normalcy".

The move comes after overnight deposit rates hit the highest level since 2002 as regular tax payments, central bank intervention to prop up the leu and demand for local currency from foreign players intensified a crunch stemming from global woes.

On Thursday, overnight rates eased to 10.00/17.00 , while the ROBOR interbank rate calculated by the central bank stood at 14.00/27.81 percent.

Many economists warn Romania is more vulnerable to a financing shock than some of its regional peers at a times of global financial unrest because of high dependence on foreign money to fund modernisation efforts.

The central bank has been increasingly concerned about high borrowing costs spilling over onto individual customers after some commercial banks raised their credit rates for consumers by several basis points in recent days.

It said it may stop publishing the interbank ROBOR and ROBID rates, used mostly as a reference in banks' dealings with clients, if rates again exceed its lending lombard rate by 25 percent.

Instead, it would use its own deposit and lending rates, at 6.25 and 14.25 percent, respectively.


The central bank has blamed the spike in cash costs on market players, saying it showed "dysfunctionalities of the interbank market".

"Maintaining a functional long term relationship between banks and their clients implies avoiding the unjustified transfer to them of rate rises," the bank said in a statment.

Meanwhile, local media have quoted a bank official saying that it will "severely sanction banks' attempt to transfer their lack of expertise onto their clients' shoulders."

"We could go as far as changing their (banks') heads," Nicolae Cinteza, head of the supervisory department at the central bank, was quoted as saying by daily Evenimentul Zilei.

The central bank declined to make further comment.

Analysts said the pressure was unlikely to have much impact on the cost of borrowing between banks but may limit increases on costs for individual customers.

"This decision will show results only if liquidity does exist on the market. Otherwise, everyone will give a quotation and enforce another," said a money market dealer with a foreign bank in Bucharest.

No comments: