- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
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- Macroeconomic developments
Interest rates already rose
submited on 14.09.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 14.09.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
In the beginning of September some of the largest Bulgarian banks undertook a shift in their interest rate policy, as for the first time in a long while banks raised interest on credit. For now the increase is not that significant (in the range 0.25-0.50 percentage points) and is valid mainly for consumer and housing credit.
The particular reason for raising interest rates is the increase since September 1st of the required minimal reserves (from 8% to 12% of the deposit base) that banks must keep in BNB. The direct use of this powerful (and the only one available) tool of monetary policy from the side of BNB was driven by the willingness to affect interest levels (in general incompatible with the rules of the currency board), and therefore credit dynamics. To banks raising required reserves means more expensive resources since part of the deposits is blocked in a non-interest bearing account and cannot be allocated to profitable transactions. A 12% level of the RMR is a record for the last 15 years and is in practice 6 times higher that the one in the Euro area.
Raising RMR is actually combined with the active influence of market factors, which lead to more expensive financial resource from internal as well as external providers. The sequence of base interest hikes in the Euro area (to the current level of 4%) has led to gradual increase of the cost of resources on the international markets. Although on the last meeting the ECB avoided new changes in the base interest rate, it is very probable for at least one hike to take place until the end of the year. The impact of the tight monetary policy in the Euro area recently is accelerated by the crisis on international financial markets, induced by the problems of risk mortgage loans in the US. It made investors more alert about allocating resources to certain higher risk markets, which include Bulgaria as well. All this has led to more expensive financial resources, which Bulgarian banks can attract from international markets. In line with this the rapid increase of the key indices LIBOR and EURIBOR after August 9th automatically raised floating interest rates on credit, tied with these indicators. Such floating interest rates have most corporate loans and mortgage and consumer credit, granted by some banks.
The internal market conjuncture also began to put more solid pressure on interest rates. For some time now there has been a tendency toward rising interest on the interbank market. The monetary statistics registered also a gradual increase of the average interest levels on some deposits in recent months. This process is related to a large extent to the necessity of attracting new resource in the banking system, particularly long-term. Although rates at which deposits are growing are relatively stable, they are considerably lower than the pace of credit accumulation. At the same time the rapidly developing segment of mutual funds began to turn into an attractive alternative to deposits as a form of savings accumulation and it is highly probable that banks face more serious competition from that side. The natural effects of such boosted demand for financial resource are the increase of interest rates on deposits, particularly those with longer term. This process already started showing up – since the beginning of September several banks changed upward interest on some of their deposit products. The accelerated competitive pressure explains also the emergence of more innovative forms of deposits (open deposits, deposits with growing interest, structured deposits, etc.).
In addition the rapid credit expansion from the last few years on one hand made the market moreover mature, and on the other hand led to fast increase in the households’ financial leverage. This suggests gradual shift from some of the credit supply to higher risk segments, which on its account means adding higher risk premium when setting interest on these credits.
It may be expected that the inflationary rate acceleration, registered in the last months, will also reflect on interest levels. NSI announced 12% annual inflation (compared to 8.4% in July), which implies that real interest on most credit and deposits are in fact negative.
The combined effect of all the mentioned factors limits most banks’ potential to entirely take the financial resource burden, seeking competitive advantages, based on low interest rates. It must be taken into account that some banks have to a great extent exhausted their internal reserves (the opportunity of economy related to improving efficiency). In parallel some banks generate additional administrative expenses related to the ongoing practice of selling credit abroad with the aim being the maintenance of the relatively high level of capital adequacy.
As a whole it may be expected that the banking market comes out of the cycle of decreasing interest rates and in the medium term we will most probably observe gradual increase of the price of the financial resource. Having mind the strong competition on the banking market we do not expect the overall rising of interest rates to be particularly drastic, but it is very probable for the increase to affect a broader range of credit and consumer groups than the currently announced.
The particular reason for raising interest rates is the increase since September 1st of the required minimal reserves (from 8% to 12% of the deposit base) that banks must keep in BNB. The direct use of this powerful (and the only one available) tool of monetary policy from the side of BNB was driven by the willingness to affect interest levels (in general incompatible with the rules of the currency board), and therefore credit dynamics. To banks raising required reserves means more expensive resources since part of the deposits is blocked in a non-interest bearing account and cannot be allocated to profitable transactions. A 12% level of the RMR is a record for the last 15 years and is in practice 6 times higher that the one in the Euro area.
Raising RMR is actually combined with the active influence of market factors, which lead to more expensive financial resource from internal as well as external providers. The sequence of base interest hikes in the Euro area (to the current level of 4%) has led to gradual increase of the cost of resources on the international markets. Although on the last meeting the ECB avoided new changes in the base interest rate, it is very probable for at least one hike to take place until the end of the year. The impact of the tight monetary policy in the Euro area recently is accelerated by the crisis on international financial markets, induced by the problems of risk mortgage loans in the US. It made investors more alert about allocating resources to certain higher risk markets, which include Bulgaria as well. All this has led to more expensive financial resources, which Bulgarian banks can attract from international markets. In line with this the rapid increase of the key indices LIBOR and EURIBOR after August 9th automatically raised floating interest rates on credit, tied with these indicators. Such floating interest rates have most corporate loans and mortgage and consumer credit, granted by some banks.
The internal market conjuncture also began to put more solid pressure on interest rates. For some time now there has been a tendency toward rising interest on the interbank market. The monetary statistics registered also a gradual increase of the average interest levels on some deposits in recent months. This process is related to a large extent to the necessity of attracting new resource in the banking system, particularly long-term. Although rates at which deposits are growing are relatively stable, they are considerably lower than the pace of credit accumulation. At the same time the rapidly developing segment of mutual funds began to turn into an attractive alternative to deposits as a form of savings accumulation and it is highly probable that banks face more serious competition from that side. The natural effects of such boosted demand for financial resource are the increase of interest rates on deposits, particularly those with longer term. This process already started showing up – since the beginning of September several banks changed upward interest on some of their deposit products. The accelerated competitive pressure explains also the emergence of more innovative forms of deposits (open deposits, deposits with growing interest, structured deposits, etc.).
In addition the rapid credit expansion from the last few years on one hand made the market moreover mature, and on the other hand led to fast increase in the households’ financial leverage. This suggests gradual shift from some of the credit supply to higher risk segments, which on its account means adding higher risk premium when setting interest on these credits.
It may be expected that the inflationary rate acceleration, registered in the last months, will also reflect on interest levels. NSI announced 12% annual inflation (compared to 8.4% in July), which implies that real interest on most credit and deposits are in fact negative.
The combined effect of all the mentioned factors limits most banks’ potential to entirely take the financial resource burden, seeking competitive advantages, based on low interest rates. It must be taken into account that some banks have to a great extent exhausted their internal reserves (the opportunity of economy related to improving efficiency). In parallel some banks generate additional administrative expenses related to the ongoing practice of selling credit abroad with the aim being the maintenance of the relatively high level of capital adequacy.
As a whole it may be expected that the banking market comes out of the cycle of decreasing interest rates and in the medium term we will most probably observe gradual increase of the price of the financial resource. Having mind the strong competition on the banking market we do not expect the overall rising of interest rates to be particularly drastic, but it is very probable for the increase to affect a broader range of credit and consumer groups than the currently announced.
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