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Romania Monetary Policy January 2021

Romania: NBR unexpectedly cuts rate to new record low in January

In an unscheduled meeting held on 15 January, the National Bank of Romania (NBR) unexpectedly axed the policy rate from 1.50% to a new record low of 1.25%. Moreover, the Bank lowered the deposit facility rate to 0.75% from 1.00% and chopped the lending facility (Lombard) rate to 1.75% from 2.00%. Meanwhile, it kept the reserve requirement ratios for both FX- and leu-denominated liabilities of credit institutions at 5.00% and 8.00%, respectively.

The Bank’s decision to cut its policy rate was underpinned by its intention to further support recovering activity and bring inflation closer to the midpoint of its target range. The economy contracted at a notably softer pace in Q3 2020 and available data hints at stronger-than-expected activity in Q4, although the recovery remained uneven amid plunging services to households and a lagging industrial sector. On the price front, inflation came in at November’s 2.1% in December—the lowest in over three years. In the medium term, inflationary pressures are expected to strengthen and return closer to the midpoint of the Central Bank’s 1.5%–3.5% target range. However, elevated uncertainty related to the liberalization of the electricity market at the beginning of the year, and risks stemming from the lack of approval of a 2021 budget, cloud the outlook.

Looking ahead, the Bank did not include strong forward guidance in its communiqué, although it noted that it would continue to hold monetary policy meetings on an ad hoc basis “whenever necessary”.

Commenting on the outlook for monetary policy, Lauren Braniff, economist at Oxford Economics, said:

“The National Bank of Romania (NBR) cut its policy rate by 25bps to 1.25% at its January meeting to support the economy and promote a quick recovery. We believe the NBR will focus on liquidity management for the next few months unless the economic outlook deteriorates significantly.”

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