High Liquidity Levels in Romanian Banking System
In June, the excess liquidity recorded by the banking system in relation to the National Bank of Romania reached the second highest historical level, according to a Profit.ro analysis. The ample funds in the market are expected to drive down interest rates offered by banks as the BNR lowers its benchmark rates.
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In June, banks on average recorded a liquidity surplus of 50.4 billion lei compared to the central bank, a increase of 4.9 billion lei from the previous month. This amount consists solely of commercial banks’ deposits overnight at the central bank, for which they receive a lower interest rate by 1 percentage point compared to the key rate.
Excess Liquidity in European Banks
Over the past month, banks in Western Europe have continued to refrain from using Lombard credits, with interest rates 1 percentage point above the key rate. The central bank has also not conducted any market operations, as there has been no need to inject liquidity through repo operations or raise market interest rates through deposit attracting operations – both of which are carried out at the key rate.
Since last autumn, banks have been sitting on a mountain of excess funds that they have nowhere to place. Some of this excess liquidity comes from foreign inflows, including investments in government bonds by non-residents, as well as euro-bond issuances by the Ministry of Finance. These funds are spent from the budget and eventually end up in the accounts held by the public and companies at banks.
Impact of Excess Bank Resources on Interbank Transactions
Banks are currently facing a situation where they have excess resources that they are unable to place, leading to a decrease in interbank transactions both in terms of frequency and volume. With no need to bid for deposits, interest rates on new term deposits have dropped by 2 percentage points to 5.4%, slightly above the inflation rate.
The National Bank of Romania’s interest rate for overnight deposits was recently at 6% annually, serving as a market benchmark. The IRCC has been around this level for about 6 quarters, while the averages for ROBOR at 3 and 6 months have also declined towards 6%.
BNR’s Latest Key Rate Reduction
Last week, the National Bank of Romania reduced its key rate from 7% to 6.75%, resulting in a lower benchmark for the market. Discussions are ongoing regarding measures to address the rising electricity prices, including implementing price caps for the next 3-6 months to stabilize the market.
Interest Rate Cut and its Impact on the Economy
Recently, the central bank announced a cut in deposit facility rates to 5.75%. This decision had an immediate effect on interbank interest rates, causing a decrease of approximately 0.25 percentage points in both the ROBOR rate and the average rate of effective transactions. Economists believe that further reductions in BNR interest rates could lead to a decrease in benchmark lending rates, as long as there is excess liquidity in the market.
However, if the international environment becomes unfavorable for Romania, which already faces challenges in its macroeconomic balances, the central bank may need to intervene to support the exchange rate. This intervention could reduce liquidity in the market, as BNR sells foreign currency to stabilize the currency. Additionally, a withdrawal of deposits from the banking sector could further impact liquidity levels.
The Impact of Liquidity Surplus Turning into Deficit
One recent episode that highlighted the consequences of liquidity surplus turning into a severe deficit was during the early stages of the Russian invasion of Ukraine. Overnight, the deficit reached nearly 17 billion lei, causing interest rates to rise by 1 percentage point in a month and by 2 percentage points in three months.
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