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Romania"s National Bank yesterday decided to cut the policy rate by 0.5% to 7.5% per annum, and to maintain the existing level of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
Analysts were expecting a cut of at most 0.25 points, but they say that the measures taken by the Central Bank were "normal".
The board of the NBR has made this decision "in order to ensure the convergence of inflation towards medium-term objectives, together with the durable recovery of economic growth", the press release of the NBR published yesterday states.
The policy rate was previously cut in May, July, August and September, by 0.5% to 8%, and analysts expect new cuts this year.
Radu Limpede, an economist with Initial Advisory, said: "It came as a surprise to many, but it was to be expected that the NBR would consider political stability now that the Parliament has validated the Government. The economy needs to restart its engines". Mr. Limpede also said that last autumn the central bank tried to avoid a depreciation of the leu, but the pressure in this regard is no longer as strong. "This cut could encourage banks to resume lending, even though they remain cautious due to the volume of bad loans", Mr. Limpede said.
Lucian Anghel, head economist at BCR, said that, in his opinion, the rate cut was determined by the risk of rising inflation as well as the end to uncertainty, in order to meet the terms of the IMF. "In the short term, we will be outside the inflation interval. The NBR"s inflation target for 2010 is 2.6%", Mr. Anghel said. In his opinion, more rate cuts are to be expected later this year. "I think there will be more policy rate cuts this year, as well as more cuts of the minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities", Mr. Anghel said, who added that interbank interest rates should drop to match the policy rate.
Ionuţ Dumitru, head-economist at Raiffeisen Bank, considers that the central bank"s arguments to cut the policy rate were the onset of political stability and the outlook of disinflation. According to him, Romania"s inflation rate may drop below 4% per year in the first half of 2010, even though inflation is expected to rise in January.
Following the decision of the NBR, starting January 6, 2010, the rate on the deposit facility will be lowered to 3.5 percent per annum from 4.0 percent and the rate on the lending facility (Lombard) will be 11.5 percent per annum versus 12.0 percent. At the same time, the penalty rate for deficits of leu-denominated minimum reserve requirements will drop to 17.25 percent starting with the January 24-February 23, 2010, maintenance period.
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