The cost of six-month funds on Romania’s interbank market rose to 1.35% on September 27, from 1.19% one week earlier, as part of a longer-term trend toward higher interest rates that has raised concerns relating to the higher borrowing cost and a possible deterioration of credit quality. 

The causes of the shift are diverse, but all of them (except for exogenous causes generated by the expected rise in the cost of money abroad after years of quantitative easing) stem from the deterioration of public finances, which is likely to result in an economic slowdown in the coming years.

The six-month ROBOR interest rate is most commonly used for indexing the interest rate paid by retail borrowers. Its increase results in a proportional expansion of the interest paid by households on their loans on a monthly basis. For years, retail mortgage lending has been the most dynamic segment of the credit market, with the volume of such loans having risen by 12% y/y to RON63.2bn (€13.8bn) as of the end of August. Retail mortgage loans account for 27.5% of Romanian banks’ portfolio of non-government loans, compared to less than 10% in October 2008 before the credit crunch.

Speaking to economica.net, ING chief economist Ciprian Dascalu singled out, among the seven main drivers that pushed up the interest rates on the money market, the dividends paid by state-controlled companies to the budget at the request of the government. The banks lost a significant volume of deposits — the retained earning held by the state-controlled companies in bank deposits prior to the dividend payment— and the availability of money for inter-bank lending consequently dried up, Dascalu explained.

Other drivers mentioned by Dascalu are the "large amount of foreign currency sold by the central bank to defend the exchange rate" and the "expected tightening of the monetary policy in the coming monetary policy meeting" on October 3.

Another reason not mentioned by Dascalu is the decrease in the volume of resources borrowed by Romanian banks from abroad (generally referred to as deleveraging). Recent rhetoric from the ruling coalition against banks, blamed for avoiding taxes by transfer pricing, caused concerns among foreign financial groups, further smoothing the deleveraging and thus contributing to the higher interest rates.

The net foreign liabilities (foreign liabilities less foreign assets) of the Romanian banking system decreased to RON13.8bn (€3bn) at the end of August, compared to €4.7bn at the end of June this year and €5.1bn at the end of August 2016. Net foreign liabilities peaked at around €25bn toward the end of 2008 and remained, under an agreement of the central bank with foreign financial groups (the Vienna Agreement) above €20bn by the end of 2012. As a share of total banking system assets, the net foreign assets hit 30% in 2008 and remained above 25% by the end of 2012. As the agreement expired, the deleveraging gained momentum starting with 2013, but its impact on the interest rates has been moderate given the weak demand on the credit market. 

A combination of credit market revival (stirred by the central bank) and expected massive borrowing of the general government (ahead of spiking budget deficits toward the end of the year and fiscal slippage in 2017-2018) resulted in rising interest rates on the money market in September. This happened in the context of expectations for higher inflation and certain (nominal) weakening of the local currency.