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Romania’s central bank cut the monetary policy rate by 25bps to 2.75% and separately cut the required reserve ratio (RMO) on foreign currency liabilities by 2pps to 14%, the monetary authority announced on November 4.

The interest rate cut was expected by bank analysts, particularly after Prime Minister Victor Ponta announced a cut one week earlier. However, the step is still rather bold, given the uncertain political outlook and the fact that this was the first meeting of the new management of the monetary authority. Investor sentiment remains robust nonetheless, as revealed by the yields in the Treasury’s auctions, the exchange rate and by the Eurobond issued in October.

The RMO cut, likely to release some €400mn-€500mn from the central bank’s reserves to commercial banks’ vaults, was rather unexpected and is to some degree aimed at alleviating the rising losses incurred by banks that are writing off their huge volumes of bad loans.

A poll conducted among bank experts indicates that a rate cut to 2.5% is not likely to be made in the near future; experts forecast the next cut by the end of 2015.

The 25bps cut on November 4 is fundamentally driven by long-term expectations for annual inflation below 2.5%. However, it is unlikely to support credit expansion in the short-term, since the banks are still working hard to clear bad loans from their balance sheets. 

Romania’s central bank cut its monetary policy interest rate by 25bps to 3% on September 30. The central bank also lowered the RMO on local currency liabilities by 2pps to 10% in September.