Romanian base rates

I and many other commentators have warned for some time about the potential for “boom and bust” economics in some Eastern European countries. Inflation is spiralling out of control in Romania evidenced by the massive 100bps rise in base rates to 9% this week. There will more rate hikes to come.

The credit crunch and subsequent financial turmoil is also having a negative impact on the currency, as it will in other Eastern European states. Latvia already looks like it will have a “hard landing.”

I continue to highlight the dangers as I know many novice investors are piling into to some of these “cheap as chips” markets. As ever, take a realistic view of the buying costs and the selling costs which must be factored into any potential returns. Do not ignore these costs. Finally, factor in the negative cashflow which is almost inevitable in some of these markets if you take a realistic appraisal of the prospects, not an overly optimistic one as portrayed by sales agents.

UK

The Bank of England cut base rates by 25bps yesterday in a finely balanced move to stave off a slowdown, but with an eye on rising global inflation. The impact of the cut on consumers and businesses is less certain as one can argue as a nation the consumer in particular has “debt fatigue.”

For property investors, a lower cost for borrowing sterling is a good thing, particularly when the cash can be invested wisely. If you can borrow a £100k from the bank at 6% per annum and make a return on that cash of anything higher than this, then you have a profit!!

If your £100k buys a property worth £500k and the price rises by 10% in one year, then the gross return is £50,000 or gross 50% return on investment. Left in the bank you would have gross £6,000 in addition to the original capital.

Following hot on the heals of our successful strategy days in London and Liverpool, we have a few more dates in the diary where you can come and meet us face-to-face to discuss your own personal ambitions, goals and property investment strategy.

The reason we do not offer investment opportunities in Bulgaria, for instance, although clearly “investor” appetite is strong (and we’d make many, many sales!), is that we wouldn’t invest there. That’s the bottom line. We wouldn’t invite you to invest somewhere we wouldn’t be prepared to ourselves.

Dates (by appointment only)

Birmingham – Tuesday 12th February
Bahrain – Wednesday 20th and Thursday 21st February
Dubai – Saturday 23rd February
Dublin – Tuesday 4th March

I have copied the Reuters article about Romania below:

Romanian Central Bank Raises Interest Rates by 100bps

BUCHAREST, Feb 4 (Reuters) - The Romanian central bank raised interest rates on Monday by a full percentage point, double what the market had expected and reflecting concern over inflation prospects.

The third hike in a row brought official borrowing costs to 9 percent as inflationary pressures cast doubt on the central bank's price growth target this year.

The bank said inflationary expectations were a key concern because of rising household incomes, risks related to higher government spending ahead of parliamentary elections later this year and uncertainty over the leu exchange rate.

"The short-term inflation outlook has worsened in the context of heightened macroeconomic risks," the bank said in a statement after announcing the rate decision.

Bankers renewed calls on the government to tighten the budget strings in order to counter private sector spending and to control wage growth, saying this was essential to anchor long-term inflation.

The central bank is struggling with resurgent inflation, fuelled by domestic consumption, high global food and energy costs and a weakened leu currency.

Last year, annual price growth shot up to 6.6 percent in December, well above the bank's 3-5 percent target. It is expected to peak in the first quarter near 8 percent, also far outside the 2.8-4.8 pct target range for December 2008.

MORE INCREASES NEEDED

Analysts said interest rates were likely to rise further this year, particularly because of risks stemming from global financial turmoil which has already hit the leu currency.

"The bank may be forced to hike rates again," said ING Bank senior economist Nicolaie Alexandru-Chidesciuc in Bucharest.

The central bank refrained from saying the rate hike was aimed at boosting the leu, which hit its three-year lows against the euro last month and has lost some 20 percent in half a year.
But the currency drew some strength from the rate decision, hitting its highest level since Jan 9. at 3.6050 per euro .

"The (bank) is now one step ahead of markets," said Simon Quijano-Evans from UniCredit MIB in Vienna.

"Against the (leu) backdrop and possibility of further spillover from global markets, the bank is at last adopting a more hawkish stance."

The central bank also reiterated plans to "pursue firm management of money market liquidity" through open market operations. It said it would adopt "prudent" measures regarding unhedged borrowing in foreign currencies.

Fast growth in foreign currency borrowing is a key concern as it exposes Romania to risks to financial stability, particularly due to global liquidity concerns and the increased exchange rate volatility, the bank said.

Demand for lending is high as Romanians race to improve living standards and companies modernise to compete within the European Union which Bucharest joined a year ago.