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Effects of ‘more expensive’ loans


https://www.ipn.md/index.php/en/effects-of-more-expensive-loans-7978_1021963.html

The National Bank of Moldova is making effort to achieve the target inflation of 5% by increasing the base rate on the main monetary policy operations up to 17.5%. The goal is to reduce the volume of lei in circulation so that the people make fewer purchases and the prices do not go astray. Economist Grigore Vieru analyzed for IPN the effects of the ‘more expensive’ loans and anticipated that the people who have money and plan to deposit it in banks will gain benefits as the interest rates are advantageous. Instead, the businesses that need loans will suffer losses owing to the interest rates.

Grigore Vieru explained that the base rate is a short- and medium-term monetary policy instrument  used by the central bank to manage the money mass (sterilize the excess of liquidity or increase liquidity) so as to achieve its key objective of ensuring the stability and maintaining prices, which is keeping the inflation rate at the level of 5%, with a variation interval of +/- 1.5%. The inflation now is open or moderate, characterized by a general annual rise of 5-10% in prices. Last month the annual rate of inflation was 8.6%, being on the rise. The central bank had thus to use its monetary policy instruments.

“We can say that the base rate is the minimal cost of money and it influences the interest on the main short-term monetary policy operations, such as overnight deposits and loans provided by the National Bank of Moldova to the commercial banks. These are also called permanent benefits that allow the banks to make short-term deposits at the central bank at a fixed interest rate. The overnight loans are taken out with the aim of making payments, increasing liquidity or maintaining the mandatory reserves. After the last change in the base rate, the interest on the overnight deposits rose to 14.5%, while on overnight loans to 20.5%,” said the economist.

The rise in the base rate with the aim of sterilizing the money mass directly affects the interest rates on loans and deposits offered to people and businesses, making them go up. The deposits become more attractive for those who have money and want to deposit it in banks. When the banks attract deposits at higher interest rates, the loans become more expensive. The loans for purchasing raw material, goods, equipment, etc. involve higher costs for companies and this negatively affects the development of entrepreneurship. The same is true about the consumption loans provided to the population.

The highest base rate was recorded in 2008 – 18.5%. Then, the gradual improvement of the economic situation led to its decrease. After April 2013, the base rate of 3.5% wasn’t modified until December 2014, when it was raised to 6.5%. Since the start of 2015, this rate was modified five times.