BUCHAREST – Romanian central bank (BNR) Governor Mugur Isarescu urged commercial banks yesterday to be cautious about reducing deposit rates further, given the country’s low level of savings. Romania, which hopes to join the European Union in 2007, needs annual growth rates of 5 percent, boosted by strong investments and growing savings to catch up with other East European nations due to join the EU in 2004. «I see no room for maneuvering for a further reduction in deposit rates,» Isarescu told a news conference. «I don’t think Romania can yet afford to discourage savings, which are the main lever for investment.» With inflation, still one of the highest in the region, nearly halved to 17.8 percent last year, banks in Romania have swiftly lowered interest rates in recent months – with deposit rates posting the steepest fall toward 12-14 percent. Isarescu said savings in Romania rose to 17 percent of gross domestic product last year from less than 10 percent in 1998. But they still lagged behind the 25 percent seen in more advanced ex-communist nations such as the Czech Republic or Hungary. Financial intermediation – the ratio of non-government loans to GDP – is below 15 percent in Romania versus the Czech Republic’s 45 percent or Hungary’s 35 percent, he said. «To reach (a financial intermediation) level of 20-25 percent by 2006-2007, there is only one obstacle – mistrust. And that’s why savings should not be undermined,» he said. Isarescu noted that savings owed their growth partly to the lack of options for investors, given the sluggish capital market and undeveloped sectors such as insurance and private pensions. «We can no longer rely on the lack of alternatives because in time this (advantage) will disappear,» he said. Spreads too high But he warned that the spread between deposit and lending rates, which also dropped to about 23 percent, was still high. «Bankers have to understand that profits require hard work,» he said. «My appeal to them is to show more restraint.» Local bankers said Isarescu’s message was clear. «In my view, he is basically telling bankers to cut spreads,» ING Bank Executive Director Paul Prodan told Reuters. An analyst said banks in Romania, which are facing increasing competition and additional costs for aligning to EU standards, were still counting on low-risk investments. «There are big banks that prefer risk-free placements, such as deposits with the central bank,» said one analyst. «They maintain high spreads because their operational costs are high.» Falling interest rates have stiffened competition and pushed banks to expand to sectors beyond corporate, such as retail banking which encompasses only 20-25 percent of banking activity.