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Romania's central bank unexpectedly eases monetary conditions

posted onJanuary 19, 2021
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The National Bank of Romania  (BNR) surprisingly slashed its policy rate- the European Union’s highest- by 25bps to a record 1.25 percent during its unscheduled meeting on Friday (Jan.15), aiming to underpin recovery of economic activity.

The bank's board has scrapped its schedule of meetings to discuss monetary policy in light of the uncertainty facing the country's economy and still only holds meeting when deemed necessary. 

It was the fourth reduction since Covid-19 struck. Last year, the BNR cut the monetary policy rate three times, by 25bp each time. Of note, central banks across the world cut interest rates 207 times in 2020, trying to support financial markets and the real economy. The US Federal Reserve took the lead in the actions. 

The Board of the BNR also decided to lower the deposit facility rate to 0.75 percent per annum from 1.00 percent per annum and the lending (Lombard) facility rate to 1.75 percent per annum from 2.00 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. 

Friday's rate cut follows a reduction in minimum reserve requirements on commercial banks’ hard currency liabilities to 5% from 6% in November.

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“Developments in the past two months were due to a relatively faster deceleration in core inflation, in a context in which the disinflationary impact of changes in VFE prices was counterbalanced by the influence of higher prices of fuels, tobacco products and electricity” BNR said in a statement. 

Annual inflation dropped to 2.1 percent in December, below BNR's midpoint target of 2.5 percent and the lowest since September 2017. 

Erste Group Research commented that a weaker-than-expected economic growth forecast and a benign inflation outlook were the likely reasons for the unexpected cut on Friday (Jan. 15). 

Romania's new premier Florin Citu in a post on his Facebook page praised BNR's decision. 

"With this decision, the central bank confirms the decrease in inflation in the medium and long term. At the same time, this decision is proof that fiscal policy in Romania is no longer a destabilizing factor in the economy" the former finance minister wrote.

Romania's currency, the leu was little changed after Friday’s surprise. But the three-month ROBOR index, the interbank interest rate used as a reference to calculate variable interests for loans in lei contracted before May 2019, plunged to 1.59% y-o-y on Monday (Jan 18).