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Romania Monetary Policy November 2020

Romania: NBR holds rates stable in November

In an unscheduled meeting held on 12 November, the National Bank of Romania (NBR) maintained the policy rate unchanged at its all-time low of 1.50%, the lending facility (Lombard) rate at 2.00%, and the deposit facility rate at 1.00%, in line with market analysts’ expectations. Meanwhile, in light of sufficient FX reserves, the Bank decided to cut the minimum reserve requirement on FX liabilities from 6.00% to 5.00%, which should provide the economy with additional liquidity.

The Bank’s decision to stand pat came against the backdrop of elevated uncertainty and subdued inflationary pressures. Following the pandemic-induced 10.3% GDP plunge in Q2, activity dropped at a softer annual pace of 6.0% in Q3. Nonetheless, the resurgence of Covid-19 cases and the reinstatement of associated restrictions could hinder the recovery at the tail end of the year. On the price front, inflation dropped to 2.2% in October (September: 2.5%) and is seen decelerating markedly in the short term. It is seen picking up in the mid-term and remaining close to the midpoint of the Bank’s target band of 2.5% plus or minus 1.0 percentage point.

In terms of forward guidance, the Bank’s communiqué struck a relatively neutral tone. Despite a softer contraction in activity in Q3 and improving financial conditions, several risks to the economic outlook remain, including the lack of a draft 2021 budget, political uncertainty amid the general elections on 6 December, and the unpredictable course of the pandemic.

Commenting on potential further interest rate reductions, Valentin Tataru, Romania economist at ING, said:

“Looking forward, we believe that although there is plenty of room to cut the key rate, the central bank will try to keep its firepower intact. More meaningful easing of the policy is only likely if the economic situation deteriorates significantly (e.g. should the economy come under a severe impact of new restrictions).”

However, Dan Bucsa, chief CEE economist at UniCredit, sees further cuts down the line:

“We currently still expect the NBR to cut the policy rate to 1% from 1.50%. A first cut could be delivered in December, after parliamentary elections, if the emerging governing coalition commits to keeping public spending in check. A second cut could come in early January. Alternatively, the NBR could deliver 50bp in cuts already in December 2020, although this scenario has a much lower probability.”

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