Romania: Central Bank reduces the monetary policy rate to record low
September 30, 2014
At its 30 September meeting, the National Bank of Romania (NBR) decided to cut the monetary policy rate by 25 basis points. The rate cut from 3.25% to 3.00% met market expectations. The monetary policy rate now sits at the lowest level on record. The NBR also decided to cut the minimum reserve requirements ratio on leu-denominated liabilities of credit institutions from 12.0% to 10.0%. However, it maintained the minimum reserve requirement ratio for foreign currency-denominated liabilities of credit institutions at 16.0%.
In order to temper interest rate volatility on the money and banking markets, the NBR decided to narrow the symmetrical corridor around the monetary policy rate from plus/minus 3.0% to plus/minus 2.75%. As a result, the Bank lowered the lending facility from 6.25% to 5.75%, while it kept the deposit facility unchanged at 0.25%.
In its accompanying statement, the Central Bank noted that economic growth has slowed down mainly due to a deceleration in domestic demand. On the supply side, most economic sectors have recorded a deterioration, “consisting either in slower annual growth rates (industry and services) or contractions in business volumes (construction).”
Regarding price developments, the Bank pointed out that the annual inflation rate remains at low levels. This is the consequence of the subdued Euro area inflation and the impact of developments in agri-food prices. The Central Bank added that “[t]he consolidation over the medium term of the projected inflation path at readings significantly lower than those forecasted previously is still uncertain.” Against this background, NBR’s accommodative monetary policy is meant to ensure price stability in the medium-term in line with the Bank’s tolerance margin of plus/minus 1.0% around its target of 2.5%, along with creating favorable conditions for lending. Nicolaie Alexandru-Chidescius, Economist at J.P.Morgan comments:
“We continue to expect another 25bp cut to 2.75% at the early November rate meeting and see risks for 1-2 more 25bps cuts in January and February 2015. Another cut in the RON reserve requirements is highly unlikely at the last meeting of 2014, but we think we might see one or two cuts in reserve requirements during 2015. These cuts are not justified only by the desire to stimulate the economy, but they are also part of the plan to lower reserve requirements close to ECB level (2%) as Romania intends to adopt euro in 2019.“
Author: Dirina Mançellari, Senior Economist