Romania’s central bank cuts monetary policy rate to record low 2 pct

The National Bank of Romania (BNR) decided on Tuesday to lower the monetary policy rate to a record level of 2 percent annually from 2.25 percent starting on April 1, reads a BNR press release.

According to Reuters, BNR’s move had been expected: Polish, Hungarian and Serbian policymakers also cut their rates earlier this month due to low inflation and the European Central Bank’s bond buying, which encourages investors to seek higher yields elsewhere in Europe.

In its meeting on Tuesday, the BNR board also decided to narrow the symmetrical corridor of interest rates on the bank’s standing facilities around the policy rate to ±1.75 percentage points from ±2 percentage points. Thus, starting with April 1, the interest rate on the BNR’s lending facility is lowered to an annual 3.75 percent from 4.25 percent, while the deposit facility rate remains at 0.25 percent per annum.

Moreover, adequate liquidity management in the banking system is to be pursued and the bank also decided to leave unchanged the current levels of minimum reserve requirements ratios on both RON and foreign currency, denominated liabilities of credit institutions.

The analysis of the latest data points to the annual inflation rate staying below the lower bound of the variation band of the flat target, alongside emerging signals of a halt in the significant decline seen previously. This occurs amid a relatively slower year-on-year fall in fuel prices and volatile food prices, as well as the persistence of a negative output gap and euro area deflation.

At the beginning of this year, in February, the annual inflation rate and the average annual inflation rate stayed unchanged versus the previous month at 0.4 percent and 1 percent respectively. The average annual inflation rate based on the Harmonized Index of Consumer Prices, which is relevant for assessing convergence with the European Union, dropped to 1.2 percent, from 1.3 percent in the previous month.

As for the economic activity, national accounts data for the final quarter of 2014 point to real GDP advancing by 2.6 percent in annual terms, on the back of further rising final consumption and a positive contribution, for the first time in two years, from gross fixed capital formation. Nearly all monthly indicators for the early months of this year, especially those on retail trade and consumer confidence, hint at the consolidation of the economic growth trend in the period ahead.

Domestic currency loans grew at a swifter pace in annual terms, against the background of the ongoing liquidity surplus in the money market and the pass-through of the successive policy rate cuts onto lending rates on new business to companies and households. On the other hand, forex loans contracted at a slightly faster rate year on year, their share in total credit to the private sector narrowing to 56.1 percent in February, down from 56.4 percent a month ahead. The real annual dynamics of credit to the private sector remained however in negative territory, reducing further the level of financial intermediation.

Looking ahead, evidence so far suggests the annual inflation rate embarking on a slight uptrend, still below the lower bound of the variation band of the flat target, reflecting in particular the combined effect of developments in volatile prices and of the narrowing, yet still significant negative output gap. The uncertainty surrounding this outlook arises from both the external environment – mostly from the geopolitical tensions in the region, the situation in Greece and the euro area, and from the growing divergence between the monetary policy stances pursued by major central banks worldwide – and the domestic environment.

Against this background, Romania’s central bank shaved another quarter point off its benchmark interest rate to a record low of 2 percent to enter in forceon April 1.

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