Recent statistics released by the National Bank of Romania (NBR) show a broad-based decline in lending rates and stabilising deposit rates across the domestic banking sector in November.

This trend was driven by monetary policy signals from the central banks in Romania and the euro area and influenced by the excess liquidity facing banks, with the loan-to-deposit ratio hitting record lows in 2016.

As a result, net interest margins (the spread between lending and deposit rates) posted widespread declines last month.

For example, on new RON loans/deposits the net interest margin narrowed by 22 basis points month on month to 5.35 percentage points: the average lending rate fell by 21 basis points m/m to 6.03%, while the average deposit rate edged up by 1 basis point m/m to 0.68%.

Likewise, the net interest margin on new EUR loans/deposits decreased by 10 basis points m/m to 2.81 percentage points in November: the average lending rate fell by 7 basis points m/m to 3.16%, while the average deposit rate rose by 3 basis points m/m to 0.35%.

Finally, for outstanding EUR loans/deposits the net interest margin narrowed by 2 basis points m/m to 2.93 percentage points in November. This reflected declines in both lending and deposit rates (towards record lows), by 5 basis points m/m (to 3.35%) and 3 basis points m/m (to 0.42%), respectively.

By contrast, for outstanding RON loans/deposits the net interest margin increased by 2 basis points m/m to 5.20 percentage points in November. The move was driven by a 2 basis point m/m rise in the average lending rate to 6.08%. The average deposit rate was unchanged at 0.88%.

As a result, over January–November 2016 net interest margins widened on RON loans/deposits (by 32 basis points YTD for the outstanding stock and by 95 basis points YTD for new business), mainly on the back of lower deposit rates (towards record lows).

On the other hand, net interest margins on EUR loans/deposits narrowed over January–November 2016 (by 61 basis points YTD for the outstanding stock and by 27 basis points YTD for new business), amid declining lending rates given the European Central Bank’s accommodative monetary policy.

In the short term, we forecast higher RON interest rates, as the NBR is expected to start raising its policy rate in 2017. In the medium term, we expect rates to converge (RON vs EUR), as the European Central Bank is likely to start a new monetary cycle from 2018.