THE NBR CUT THE POLICY RATE TO A NEW HISTORICAL LOW Analysts: The government will be able to borrow at a lower cost

The Board of Directors of the NBR yesterday decided to cut the policy rate from 5.25%/year, to 5.5% a year, a communiqué of the Central Bank states. This level represents a new historical low. The minimum required reserves for deposits in lei and foreign currencies will remain unchanged, the press release mentions. The NBR will also carefully monitor the liquidity in the banking system, according to the document.

Mugur Isărescu, the Governor of the NBR, said that the monetary policy measures of the Central Bank are felt quicker by the market for government bonds and more slowly by the commercial banks. He said that it was unfortunate that the cuts of the policy rate have overlapped with the tensions in Europe, and especially among commercial banks in the Eurozone.

When asked about the impact which a possible cut of the minimum required reserves would have, the manager of the Central Bank explained that Romania has a certain duality, as on one hand the market is lacking liquidity, which is reflected in the weekly refinancing which some banks do with the NBR, and on the other hand, some banks have a liquidity surplus, which is noticeable in the use of the deposit facility which the Central Bank grants them.

He said that he expects the monetary policy measures to begin being felt throughout the market faster in time.

• Analysts: The decision of the NBR helps the state raise financing

The general consensus among analysts is that the decision of the NBR is in favor of the state, which can thus get financing easier from banks, as the customers of the commercial banks will hardly feel the effects of this measure.

Economic analyst Florin Cîţu considers that the measure was somehow forcefully brought about by the yield of the government bonds. With commercial banks currently lending to the state at an interest rate of 5.25%/year, it would have been difficult for the Central Bank to keep the rate at 5.5%, he said. As for the argument of the convergence of the growth rates for lending in lei, and in Euros, respectively, the analyst explained that loans denominated in lei usually have a maturity of less than one year, which suggests that companies resort to this kind of loans to finance their current needs, while still opting for loans denominated in Euros for investments.

Today, the interest rate for the deposit facility will be cut from 1.50% to 1.25%, whereas the interest rate for the deposit facility for the lending facility (Lombard) will be 9.25%/year, compared to 9.50%/year, the NBR announced.

The officials of the Central Bank have explained that the cut of the policy rate comes as a result of the downward trend of inflation, which fell to 2.6% last month, from 3.14%, at the end of last year. Also, the CORE2 adjusted rate of inflation, calculated by eliminating managed prices, volatile prices and the price of tobacco and alcohol, fell from 2.05%, compared to 2.37% in December 2011, according to the press release.

• The historic low of the annual inflation rate comes on the back of the agreement with the IMF

The representatives of the NBR consider that the fall of the annual inflation rate to an all -time low is the result of the fulfillment of the economic and financial program included in the agreements with the European Union (EU), the International Monetary Fund and other financial institutions. Amid the maintenance of an adequate confluence of the real monetary conditions in a broader sense, the dissipation of the impact of the VAT hike and the relatively favorable evolution of the price of foodstuffs have contributed to the quick deceleration of inflation, according to the officials of the NBR.

As a result, in autumn 2011, the NBR began a cycle of policy rate cuts, accompanies by adequate adjustment of the liquidity conditions, as the moves are quickly received by the money market by cutting the rates interbank policy rates below the monetary policy rate, the institution says. The improvement of the monetary market conditions has induced a continuously downward trend of the yields of government bonds on the primary market, and the secondary market has become more active in turn, with a favorable impact on the redistribution of liquidity in the banking system, according to the Central Bank.

• The sovereign debt crisis negatively affects the distribution of liquidity in the market

In spite of these positive evolutions, the tensions and the uncertainties associated to the sovereign debt crisis across Europe have also been felt on the Romanian banking market resulting in the limitation of mutual exposure among lenders, which had an unfavorable impact on the distribution of liquidity in the banking system and on the money market, and has imposed the intensification of the liquidity regulation role of the central bank, in line with the global and European trends, the communiqué states. These factors, corroborated with the particularities of the loan/deposit ratio for each individual bank and with the deleveraging of some lenders, in line with the European trend, are reflected in a slower recovery of lending to the private sector, according to the BNR.

The dynamization of the activity on the market for secondary government bonds, together with the rebuilding of the confidence of operators and investors, will contribute to the attenuation of the uneven distribution of liquidity, by ensuring the better allocation of resources, the officials of the Central Bank said, who said that they are expecting the statistic data concerning the evolution of the interest rates on the loans granted to the non-government sector for last month, to confirm the continuation of the propagation of the monetary policy signal, in particular on the lending segment for non-financial companies, where the growth pace for new loans denominated in lei is close to that of new loans granted in foreign currencies.

The assessment of the inflation outlook reconfirms the deceleration in the near future, of the total and core inflation alike, according to the NBR. The evolution of the macroeconomic indicators prove the persistence of the aggregated demand deficit as the annual positive dynamic of industrial output and of exports amid the deepening of the uncertainty concerning the outlook for economic growth in Europe, the press release explains.

• The annual inflation rate will remain stable near the 3% target

The officials of the Central Bank consider that the statistic basis effects will lead to a temporary increase of the annual inflation rate in the second half of the year, but will not cause it to exceed the fluctuation band of 3%. "These outlooks confirm the need to maintain the real monetary conditions largely adequate to the expected fluctuations of the annual inflation rate for the entire forecasting period", according to the report.

The consolidation of inflation within the fluctuation band around the target creates the premise for the maintenance of the financial stability and obtaining a sustainable economic growth, the officials of the NBR consider, who warned however, that the domestic risks of the electoral context, together with the uncertainties concerning the evolution of the foreign environment, of the capital flows and of volatile prices, demand a calibration of the monetary policy in order to efficiently anchor the expectations and to ensure price stability in the medium term.

The following meeting of the Board of Directors of the NBR is scheduled to take place on May 2nd, when the new quarterly inflation report will be reviewed.