The National Bank of Romania (BNR) decided to cut the monetary policy rate to 1,75 percent per annum from 2 percent per annum starting June 2, 2020. Also, BNR decided to lower the facility rate to 1.25 percent per year from 1.5 percent and the lending facility rate (Lombard) to 2.25 percent from 2.5 percent.
The current levels of minimum reserve requirements ratios on both RON and foreign currency liabilities of cresit institutions will remain the same. The decision taken by BNR should lower the rate used by commercial banks in relation to customers and credit offerings.
The global economy and its outlook have been strongly affected by the major adverse impact and the unprecedented uncertainty generated by the coronavirus pandemic, alongside the containment measures imposed by the authorities. With a view to cushioning the fallout, many central banks in the advanced and emerging economies, the ECB and central banks in the region included, took measures to ease the monetary policy stance and improve financial conditions, consisting in policy rate cuts, purchases of financial assets and liquidity provision via repurchase transactions, even over the long term.
Likewise, the National Bank of Romania’s response in this context was prompt. Specifically, the NBR Board convened for an emergency meeting on 20 March 2020 and adopted a package of measures aimed at mitigating the economic impact of the pandemic, but also at consolidating liquidity in the banking system so as to ensure the smooth functioning of the money market and of other financial market segments, as well as the smooth financing of the real economy and the public sector. The package included a cut in the monetary policy rate by 0.50 percentage points, to 2.00 percent, and the narrowing of the corridor defined by interest rates on standing facilities to ±0.5 percentage points from ±1.0 percentage point, which implied leaving the deposit facility rate unchanged at 1.50 percent and lowering the lending facility rate by 1 percentage point to 2.50 percent. In addition, it was decided that the NBR should conduct repo transactions for providing liquidity to credit institutions, as well as purchases of leu-denominated government securities on the secondary market.
On the domestic front, the severe economic impact of the coronavirus pandemic – likely to abruptly change the Romanian economy’s path in mid-2020 – began to reflect in the latest statistical data.
The annual CPI inflation rate remained unchanged in March at 3.05 percent and then fell to 2.68 percent in April (from 4.0 percent in December 2019). Behind its decline versus December 2019 stood disinflationary base effects and the plunge in the oil price, alongside the removal of the special excise duty on motor fuels.
The annual adjusted CORE2 inflation rate (which excludes from the CPI inflation administered prices, volatile prices, and tobacco product and alcoholic beverage prices) tended however to increase slightly during the first four months of 2020, contrary to forecasts, reaching 3.7 percent in April from 3.66 percent in December 2019. The evolution owed to changes in consumption structure brought about by social distancing measures, associated also with probable disruptions and cost increases in production and supply chains, overlapping persistent demand-pull and wage cost-push inflationary pressures.
Average annual CPI inflation rate and average annual inflation rate calculated based on the Harmonised Index of Consumer Prices dropped to 3.7 percent in March and 3.6 percent in April from 3.8 percent and 3.9 percent respectively reported December 2019 through February 2020.
According to preliminary data, economic growth slowed down visibly in 2020 Q1 to 2.7 percent from 4.3 percent in the previous quarter, in spite of remaining particularly robust in the first two months of the year. At the same time, the trade deficit posted a markedly faster widening amid a steeper decline in exports than in imports of goods and services. Consequently, the dynamics of the current account deficit regained momentum, the improvement in the primary and secondary income balances notwithstanding.
Financial market conditions improved after the adoption of the monetary policy decisions and after overcoming at end-March the peak of tensions generated by the COVID-19 crisis. Key interbank money market rates witnessed a significant downward adjustment in the closing 10-day period of March and afterwards continued to decline gradually, while interest rates on leu-denominated government securities went down progressively, amid the increased volume of liquidity injected by the NBR through bilateral repo operations and through purchases of leu-denominated government securities on the secondary market. At the same time, the EUR/RON exchange rate saw lower fluctuations, moving in a narrow range, inter alia amid an improvement in global financial market sentiment.
Lending remained relatively strong in March, before coming under the influence of the pandemic crisis in April. Thus, the stock of credit to the private sector contracted slightly, its annual dynamics slowing to 5.7 percent from 6.9 percent a month earlier. The share of domestic currency loans in total private sector credit narrowed slightly to 67.1 percent against 67.6 percent in December 2019.
In today’s meeting, the NBR Board examined and approved the May 2020 Inflation Report, which incorporates the latest available data and information. The current macroeconomic forecasts were made under extremely uncertain and highly difficult conditions, amid multiple unknowns concerning the evolution and implications of the pandemic and the related measures. The new scenario shows a change in the envisaged trajectory of the annual inflation rate, especially in the second part of the forecast horizon. Specifically, after having posted a moderate decline in 2020 Q2, the annual inflation rate is expected to climb again in the upper half of the variation band of the target in the latter half of this year, before repositioning itself and remaining around the mid-point of the target until the end of the projection horizon, amid disinflationary pressures from the aggregate demand deficit.
The uncertainty surrounding the inflation outlook is unusually elevated, given the unprecedented nature of such an economic shock domestically and internationally, implying an abrupt lockdown on businesses and sectors, but also consumer behaviour shifts. Major sources of uncertainty are also the speed of economic recovery following the gradual removal of containment measures and the effectiveness of support programmes and actions addressing companies and households. On the domestic front, significant uncertainties relate to the fiscal and income policy stance, as well as to the functioning of the monetary transmission mechanism in the context of legislative initiatives targeting the banking system. Increased uncertainty and risks also stem from the euro area and world economy contraction and from the international financial market developments amid the coronavirus pandemic crisis.
In today’s meeting, based on the currently available data and assessments, but also in light of the extremely high uncertainty, the NBR Board decided to cut the monetary policy rate to 1.75 percent per annum from 2.0 percent per annum starting 2 June 2020. Moreover, it decided to lower the deposit facility rate to 1.25 percent per annum from 1.50 percent per annum and the lending (Lombard) facility rate to 2.25 percent per annum from 2.50 percent per annum. Furthermore, the NBR Board decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions. Given the liquidity shortfall on the money market, the Board decided to further conduct repo transactions and continue to purchase leu-denominated government securities on the secondary market, keeping financial market stability. Moreover, the central bank will seek to maintain international reserves, forex ones included, at an optimal level.