Romania: NBR cuts rates in emergency meeting in March; points to QE program
March 20, 2020
In an emergency meeting held on 20 March which took market analysts entirely by surprise, the National Bank of Romania (NBR) cut the policy rate by 50 basis points to 2.00% and the lending facility (Lombard) rate by 100 basis points to 2.50%, while leaving the deposit facility rate at 1.50%. The NBR also announced a package of measures aimed at mitigating the impact of the widening coronavirus outbreak on households and businesses.
The special measures included the provision of liquidity to credit institutions via repurchase transactions to ensure the smooth functioning of the money market and other segments of the financial system. However, the most surprising decision was the Central Bank’s intention to buy leu-denominated government securities in the secondary market, marking the first time it would engage in such activity. Although details still abound over the workings and timeframe of the program, as well as over the value of the purchases the NBR will conduct, it is likely they will come to support the Finance Ministry’s increased debt issuance needs in order to address the economic impact of the Covid-19 pandemic.
Looking ahead, the Central Bank also stressed it is ready to cut the minimum reserve ratios on leu- and foreign currency-denominated liabilities on banks depending on how economic and financial conditions evolve. Moreover, the NBR also decided to suspend the previously announced calendar of monetary policy meetings and hold them whenever necessary, which as noted by Valentin Tataru, Romania economist at ING, hints at a “crisis-management mood”. On the currency side of things, Tataru added:
“[T]he depreciation pressures on RON will likely increase on the back of lower carry rates and improved liquidity. However, the NBR has repeatedly proven that is able to smooth the volatility and steer the currency. We expect stability on the FX front for the days to come, until the market will have more details on NBR’s bond purchase intentions.”
Author: Javier Colato, Economist