THE DECISIONS OF THE NBR Cutting the interest rate can not restart the seized up engine of the economy

This year as well, the official statistics have continued to show that our economy is growing, and the unemployment is dropping. Unfortunately, these positive results are not found in the level of tax receipts, as the foreign imbalances seem to become worse. To say nothing of the population's dissatisfactions echoed in the press.

In this context, the NBR yesterday decided to cut the policy rate by 0.25 percentage points, down to 3.25%.

In an article published on the Hotnews website, Lucian Croitoru, advisor to the governor of the NBR, expressing his personal opinion, states that "a cut of the interest rate is necessary", as "the monetary policy and the fiscal policy will be both anti-cyclical for the first time in the last 10 years".

Bestowing an exaggerated importance upon the positive effects of a cut of the social security contributions (CAS), without taking under consideration the fiscal burden as a whole that Romanian companies are forced to bear, Lucian Croitoru considers that the cut of the policy rate, aside from making it equal to the interest rates on the interbank market, would help "slow down the inflows of foreign capital as well as reduce the pressure which is pushing the leu to strengthen".

Foreign capital inflows? Where from? The current account deficit of the balance of payments has re-entered a significant downward slope, as the recovery of the direct foreign investments is far from the years of glory of the second half of the previous decade.

The conclusion? "The effects of cutting the interest rate are somewhat uncertain, even though, given the high level of debt denominated in foreign currency of companies and households, they could be slightly unfavorable", as Lucian Croitoru writes. In order to cover the other angle as well, the advisor to the governor of the NBR estimates that the cut of the interest rate could have positive effects on the economic growth through lending.

Such an effect would turn Romania into an exceptional example of quick transfer of the effects of the monetary policy into the real economy, in the context of an unprecedented global crisis.

A few days ago, I wrote about the quantitative easing in Brazil (author's note "The true defeat of Brazil hasn't come yet", BURSA, 01.08.2014) where "the lack of demand for loans is caused by the low confidence in the business sector", as demonstrated by Financial Times, and that lack of confidence is also caused by the "frequent regulatory changes, the incredibly complicated fiscal code and the interference of the government in certain economic sectors".

These are the characteristics of our economic environment as well, which is being subjected to a systematic oppression by the authorities. And then, who has anything to gain from a new cut of the policy rate? Only those who "benefit" from the financial repression that the Central Bank of Romania has instituted for some time now.

As there is a trend of the government borrowing costs increasing on the international markets, by cutting the interest rate, the NBR can attempt to maintain the borrowing environment that benefits the Romanian government, at least until after the presidential elections.

Let's assume that Romania's economic outlook is good, and a new cut of the policy rate will further stimulate lending. Why then is the Ministry of Finance announcing the launch of bonds with a face value accessible to the population, according to some articles published in the financial press?

Could the reason behind this be the unwillingness of banks to accept the current medium term yields, amid the increasing pressures felt in the international markets to raise interest rates? In other words, is there a need to find a new bunch of suckers?

Moreover, while the banks may be able to lend money to the government through a simple push button, the same cannot be said of the citizens. Any money they invest in government bonds means savings that aren't allocated to the capitalization of the real economy.

One of the reasons is, of course, the easing policy of the NBR that discourages saving. People who are tempted to buy government bonds start off with the notion that those investments are safe. But shouldn't there be a "moral" side to the "investment" as well? There is no certainty that the funds would be used for infrastructure projects or other investments which create positive added value but rather, that the money will be channeled towards maintaining a status-quo which is extremely harmful to the economy and to the citizens.

Aside from the moral aspect, how "safe" is an investment in government bonds, especially when investors are beginning to worry even over the prospects of investments in the government bonds of some countries that are considered developed? Perhaps Romanian retail investors should remember an adage familiar to financial market participants in the last few decades, which has been brought to the forefront by the onset of the international financial crisis: "government bonds are certificates of guaranteed confiscation". This "guaranteed confiscation" does not mean actions like the full or partial nationalization of the pension funds, like has happened in Hungary or Poland, but rather the significant erosion of the principal through inflation. Of course there won't be any guarantee in Romania either, that, once the private pension funds have accrued a sufficiently high amount, they won't be seized by the government to reduce the public debt.

Aside from evaluating the possible effects of a new cut of the policy rate, Lucian Croitoru still admits that they will depend a lot on what the Federal Reserve will do from now on.

And the American Central Bank seems to have no strategy to exit the quantitative easing program, as Bloomberg writes, amid the increase in the number of voices among the regional presidents of the Reserve, who are asking for the raising of the interest rates to start, once the quantitative easing program completes in autumn.

"Everybody is now talking about when the first interest rate hike will come", said David Bloom of HSBC, according to an article in The Telegraph. "There is a risk that the markets will come to the conclusion that the Fed is overwhelmed by the events, and long term interest rates will increase. If that happens, then emerging markets will be crushed", the analyst of HSBC said.

"The Fed will move to restricting the monetary policy because it thinks that the US economy is strong enough to resist, and this will cause capital to seek refuge in dollar-denominated assets", writes Ambrose Evans-Pritchard in the same article of The Telegraph. The effect will be "the vacuuming of the global liquidity", as the British journalist writes, and the beginning of a steep increase of the financing costs, especially for emerging markets.

Then why would the NBR cut the interest rate, instead of at least waiting until the end of the year, especially since a sustainable relaunch of the lending is highly unlikely, because the high volume of non-performing loans in the banking system does not allow it?

The answer is simple: the National Bank of Romania plays its own part in maintaining the illusive solvency of the state and is preventing precisely the beginning of the structural changes which would be so badly needed in the years to come.