On Tuesday, the BNR will announce either an increase in the base interest rate or its maintenance at the level of 6.75%. There are arguments on both sides.

What is certain is that the days of low interest rates and cheap money are over.

What are the variants of the BNR CA table

Scenario A: The NBR makes money more expensive by raising the key interest rate to 7%.

What does this mean for your money? First, if you have loans in lei with variable interest, that means your rate will go up. If you have deposits, you will get a better return (but well below the rate of inflation). If you have credit cards, they may be a bit more expensive. But let’s break them down one by one.

Arguments: “We strongly support a 25 basis point increase to 7.00% against the decision to leave the key rate unchanged. In any case, markets may be quite indifferent to this decision, as the broader context of liquidity significantly dilutes the relevance of monetary policy. Regarding the CPI, we expect inflation to reach 16.6% at the end of 2022, although negative surprises cannot be ruled out,” says Valentyn Tetaru, Chief Economist at ING Bank Romania

Scenario B: The NBR will maintain the current level of the key interest rate

Arguments: “A 25 basis point hike would do little good and would be somewhat inconsistent with the recent de facto easing of monetary conditions,” according to an analysis by BCR Chief Economist Cipriano Dascalo.

What are reference interest rates?

Reference interest rates – also known as “reference interest rates”, “reference rates” or “reference rates” – are the basis of all types of financial contracts, such as mortgages, overdrafts and other more complex financial transactions, the European Central bank says.

They play an important role in the financial and banking system, as well as the economy as a whole. But what exactly makes them so important? And for what reasons are they reforming now?

Reference interest rates are used by everyone – individuals or companies.

For example, banks use them when they provide loans to private or corporate customers.

A bank may agree to lend money to a company at an agreed interest rate set at a certain base interest rate plus 2%, meaning that the company will pay interest at 2% above the current base rate.

Therefore, the cost of a bank loan will increase if the base interest rate increases and decrease if the base interest rate decreases. In this case, the reference interest rate can be a reliable, independent and relatively simple guide for all parties involved.

Companies may use reference interest rates to evaluate balance sheet positions; in other words, these rates allow the accountant to more easily calculate the final value of the company (more precisely, the financial assets it owns).

Other uses of benchmark interest rates include: calculating overdraft penalties on cash accounts, calculating interest on some retail deposits and negotiating interest rates on mortgages and retail loans.

The last time the NBR key rate was 7% was 12 years ago, in February 2010.

At that time, inflation was 6.1%, and a year later it fell to 5.8%.

Going back to today, we will also say that many lei loans with variable interest rates are linked to an index called ROBOR, which represents the average interest rate at which banks lend money to each other. On Monday, this indicator was 7.72% (for loans with a maturity of 6 months), and ROBOR for 3 months was 7.45%

In the event of an increase in the price of money, the decision of the BNR will affect both the loan rates and the remuneration for the deposits you have in the bank.

In the case of credit cards (where APRs in the market can be as high as 40% for some cards), the BNR’s decision could mean a further increase in the interest the bank charges for using the money.

If you are the owner of such a card and have debts on it, it would be good to pay them off as soon as possible, because the more BNR increases the key interest from now on, the more you will suffer in the future.

If the BNR increases the price of money, it must be said that this increase is not immediately transferred to the rates you have in the banks.

As representatives of several financial institutions told HotNews, bank interest rates are usually updated quarterly, depending on the bank to bank and the details of each credit agreement.

In the case of loans granted to individuals, the indexes included in the final interest are ROBOR or IRCC, depending on the legislation in force on the date of the loan. The indicated indicators differ from the main interest. Thus, a change in the key interest rate is not immediately transmitted to these indices. However, changes in the prime rate over time are also reflected in the indexes used to calculate variable interest rates on loans.

Unlike ROBOR, for IRCC, the correction can be delayed by about three months due to the way this index is taken as a value in credit contracts.

In the case of existing loans, interest rates vary depending on the type of index included in the interest composition, ROBOR or IRCC.

For example, people who took a loan before May 2019 have the ROBOR reference index in their loan contracts. Thus, interest on the loan is in the form of ROBOR + fixed margin of the bank.

Although the bank’s margin is fixed and does not fluctuate, ROBOR 3M is updated in credit agreements after 3 months, 6 months or other terms according to the credit agreements.

Therefore, customers who receive an update in February will have a ROBOR containing changes to the November, December and January ROBORs. In the case of new loans, regardless of whether they are fixed or variable interest, the change in market indicators reflects the new dynamics of the market. Therefore, the value of money is different, in this case, the value of loans may also change.