One theme I keep repeating is that the credit channel is not working in Romania ans will not be working as long as the central bank is focused solely on the exchange rate.
Tonight the NBR put forward via Deputy Governor Mr. Popa another piece of evidence to show that credit channel is working and what we are seeing is just a lag effect. The evidence in question is the interest rate for new credit which according to the NBR has fallen by 0.40% in response to the 0.75% cut in the key policy rate.
Let’s see what the evidence shows. The graphs below show for both households and corporates the interest rates for existing and new credit.
There are few things coming out from those graphs. The most important is that the recent drop in rates for new credit can hardly be attributed to a more relaxed monetary policy. The data shows that for households rates for new credit were lower in December 2010 or July 2011 than they are today. At that time the key policy rate was 6.25% while today is 5.5%.
Furthermore very important to note that the average rate for new credit over the last 12 months when the key policy rate was higher, still for households, was 12.45% while today is at 12.66%. Thus is very hard to prove that decrease in new credit rates for the last two months has anything to do with a lower key policy rate. For those interested the same is true for rates regarding new credit for corporates.
Next, please not that the spread between new and existing credit for corporates is much smaller than the one for households. This tells me that the market for corporate credit is much closer to a competitive one than the one for household credit.
A working credit channel is paramount for any central bank. It is the main channel through which monetary policy gets to the real economy. To work it needs a proper framework. Unfortunately the Romanian central bank has undermined this channel when it started to focus primarily on the exchange rate and use the monetary base as instrument. In this framework the key policy rate is irrelevant and any correlation between this rate and the ones for credit is at best spurious.