Romania: Central Bank lowers policy rate to new all-time low and cuts reserve requirement
May 6, 2015
At its 6 May meeting, the National Bank of Romania (NBR) decided to reduce the monetary policy rate from 2.00% to 1.75%, effective 7 May. The Bank’s decision to cut the rate to a new all-time low came as a surprise to the market. In addition, the Board decided to narrow the symmetrical corridor of interest rates on the NBR’s standing facilities around the policy rate to plus/minus 1.50% from plus/minus 1.75%. As a result, the interest rate on the NBR’s lending facility (Lombard) was lowered to 3.25% from 3.75%, effective 7 May, while the deposit facility rate was kept unchanged at 0.25%. In addition, the Bank decided to cut the minimum reserve requirement ratio on leu-denominated liabilities of credit institutions from 10.00% to 8.00%. Conversely, the Bank left the reserve requirement on foreign-currency-denominated liabilities unchanged at 14.00%.
In the accompanying statement, the NBR pointed out that Romania recorded a solid expansion last year and made up for the ground lost after the financial crisis. The Central Bank sees that, strengthening consumption going forward and a recovery in investment will support economic growth. Moreover, the NBR noted that recent indicators suggest that the current account deficit would remain sustainable in the medium term.
Regarding price developments, the NBR stressed that it now projects a much lower inflation path than previously expected. The Bank sees inflation remaining under the lower bound of its target band and expects it to drop to around zero in the next three to four quarters before picking up gradually. The Bank’s downward revision of its inflation forecast mainly reflects the government’s plan to substantially cut the value-added-tax on food items on 1 June. The next monetary policy meeting is scheduled for 1 July.