Банкеръ Weekly



The base interest rate collapsed last week to one of its lowest levels since 1991, reaching 2.44% annually. It was only last February that the rate remained lower (2.41%) for about a month. It is to be noted that the base interest rate, which all financial institutions and their customers use, will remain some 30% lower (2.44%) by end-July compared to its June level (3.83%). The reduction followed the June 28 auction of three-month T-bills. The base interest rate is equal to the average sale price of these bills. At the auction, the Ministry of Finance offered paper of BGN12MN par, and received bids worth BGN28.6MN. Dealers commented for the BANKER weekly that considerable amounts of treasury bills were ordered by the Deposits Insurance Fund that used the banks as intermediaries in the acquisition of securities, bearing a 2.33% annual yield. However, it is difficult to find out how many T-bills the fund has acquired, because it made the applications through several banks. Bisser Manolov, Chairman of the fund's Management Board, told the BANKER weekly: I warned the banks that the fund would buy government securities since it needed to invest its money in short-term assets that bring a higher profit than deposits do. I will not tell you how many bills we have bought. But keep in mind that 2.35% or 2.4% per annum is a much higher profit compared to the 2% annual profit from deposits. Especially when it comes to huge amounts of money.But even if the fund had not interfered in the auction, the interest would have fallen anyway because the highest yield banks have requested to get in order to buy 3-month treasury bills was slightly above 2.6% a year. Just a month ago dealers from some of Bulgaria's largest banks thought that after the base interest rate jumped up from 2.59% to 3.83% (on May 28) it would go up to 5% by the end of June. However, they made that forecast without taking into account that on June 3 the Governing Board of the Bulgarian National Bank (BNB) would decide to buy national currency and sell it to the banks only at the fixed euro rate, BGN1.95583. These transactions will not bring a 0.5% commission to BNB as they used to before June 3.That is how with just one move BNB lent a hand to the Ministry of Finance again. The reduction of the base interest rate will lead to lower budget expenses on the domestic debt. And the funds released, although not significant, can be used by the Finance Minister Milen Velchev to cover either the budget deficit or other urgent current expenses of the Treasury.What do customers gain from the sudden reduction of the base interest rate? Unfortunately, almost nothing. A month ago, when the base interest rate went up to 3.83% from 2.59%, most banks declared that they would not raise the interests on credits because these rates were influenced by the base interest indeed but were defined on the so called basic interest plus a supplement which amount depends on the type, the amount and the redemption period of the loan. It is worth noting that each bank has its own formula by which it calculates that basic interest. In most cases, that interest also depends on the expenses that the crediting institution makes to serve deposits and accounts attracted from individuals and companies as well as from other financial institutions.Right now we do not intend to reduce the interests on our credits. We did not raise them in early June, when the base interest went up to 3.83% per annum, either, Borislav Moyanov, member of Bulgarian Post Bank Managing Board, said.A month ago only the banks that base their interests on credits on the base interest rate announced they would raise them. But they did not manage to do so, because the high base interest rate remained for only one month. Of course, its reduction from 3.83% to 2.44% will not be automatically followed by cheaper credits to individuals and companies. The banks will only reduce the price of their credits when they see a strong and significant increase of the deposits and accounts of individuals and companies or when they try to expand their market share. For example, on June 29 HVB Bank Biochim announced that it was reducing by 1.5% the annual interests on consumer loans for the summer months - from July to September. This is a typical promotion aimed at enlarging the bank's market positions. For the present, however, most banks will refrain from permanent reduction of the interests. At least until they see how much free money they will have after making up for the lowest required reserves which they have to do by mid-July.

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