Romanian c-bank maintains policy interest rate but announces imminent rate cut.

By bne IntelliNews May 6, 2013

Romania’s central bank has maintained its monetary policy interest rate unchanged at 5.25%, in line with expectations – but narrowed the interest rate corridor on overnight deposit/lombard rates to +/-3pps.

What is more important, central bank governor Mugur Isarescu announced earlier this month the beginning of a new interest lowering cycle starting on July 1 – except for cases when bad news come from the real sector, particularly related to this year’s crop. The interest rate cuts are supported by better-than-expected disinflation, the governor explained.

The monetary policy interest rate thus stays at the 5.25% level, where it was set in March 2012, the central bank said. The interest rate corridor is narrowed from +/-4pps to +/-3pps, effective as of May 3 – with the view of reducing the interest rate volatility on the money market.

Finally, the central bank will continue to pursue an adequate liquidity management.

IntelliNews Comment: First, the interest rate cut announced for July came as surprise. Bank analysts were predicting such a move for November at the earliest. It is unclear whether the planned interest rate cuts are prompted by the better-than-expected inflation or by the local currency’s strengthening driven by the foreign investors buying local public debt. At the end, it is so far only rhetoric, while Romania’s central bank has maintained a long track of not disclosing future steps.

Romania’s currency strengthened in late April to its strongest level against the euro since the end of 2011. This is good news for inflation indeed but the central bank might suspect that further strengthening would not be sustainable.

Second, narrowing the interest rate corridor makes sense in the context of lower interest rates. By comparison [with Poland, Hungary] it remains wide, but the lower edge will have immediate impact on the short-term interest rates on the money market.

 

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