Romania’s central bank said it lowered its monetary policy interest rate by 25bps to 4.25% on Monday, September 30. The monetary authority thus completed a 1pps interest rate cut episode, which started in June.

Analysts expected the bank would cut by up to 50bps the interest rate at this week's monetary policy meeting, therefore the rather moderate [25bps] step will predictably feed expectations for further cuts by the end of the year.

Nonetheless, the space for further wide rate cuts is narrowing as the policy rate is coming close to the projected inflation. Other limitations for further rate cuts stem from the central bank’s concerns about the exchange rate.

The monetary authority uses the policy rate to make available one-week funds to commercial banks under weekly auctions held every Monday.

The central bank will monitor closely the impact of past interest rate cuts on inflation and move to gradually reduce the monetary policy interest rate only in case this impact does not harm the inflation outlook, Ziarul Financiar daily reported, quoting the government's Letter of Intent sent to the IMF regarding the follow-up two-year deal the country will soon sign with the Fund.

The central bank will further cut the monetary policy rate only if i. headline inflation comes within the 1.5-3.5% targeted band,  ii. inflationary expectations are firmly anchored, and iii. the other market circumstances allow such a step, the report said.

Romania’s central bank sees the end-year headline inflation at 3.1% and also forecasts that the annual inflation would remain within the 1.5%-3.5% targeted band for the two-year horizon envisaged, its latest Quarterly Inflation Report shows. The consumer price inflation eased to 3.7% y/y in August from 4.4% y/y in July and 5.4% y/y in June, the statistics office INS has reported.