National Bank of Romania cuts rates in July

At its meeting on 5 July, the National Bank of Romania (NBR) decided to cut its three main rates by 25 basis points, bringing the monetary policy rate to 6.75%, the lending (Lombard) facility rate to 7.75% and the deposit facility rate to 5.75%. The move was in line with market expectations and marked the first cut since January 2021.

The Bank's decision was primarily influenced by a faster-than-expected decline in the annual inflation rate in the first two months of Q2. After standing at 6.6% in March, inflation fell to 5.9% in April and to 5.1% in May, driven by a significant drop in energy prices due to legislative changes and a deceleration in food price growth. Additionally, sequential economic growth fell short of the Bank’s estimates in Q1, indicating a narrowing excess aggregate demand.

The NBR did not provide specific forward guidance on the future direction of interest rates. That said, it emphasized its readiness to use the tools at its disposal to achieve medium-term price stability and safeguard financial stability, indicating a cautious approach to monetary policy in the face of elevated uncertainties. All of our panelists expect the Bank to reduce rates further by year-end, with forecasts ranging from 25 to 125 basis points. The next meeting is scheduled for 7 August.

Vlad Ionita, analyst at Erste Bank, expects the NBR to cut rates by an additional 75 basis points by end-2024: “We maintain our view that the key interest rate will reach 6.00% by year-end with 25bp cuts at each meeting left for this year, but we see some material risk (~30%) for one less cut vs our baseline in case inflation evolution requires a more prudent approach provided NBR remains data dependent.” Meanwhile, ING’s Stefan Posea expects the Bank to deliver a single 25 basis points cut: “We continue to think that a cautious easing cycle still remains in place, despite the "significantly" lower inflation trajectory compared to the previous forecasts envisioned now by the Bank. We don't think that a second consecutive cut in August is a viable option and, at this stage, we narrowly hold on to our November 25bp rate cut call, taking the key rate down to 6.50%.”

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