The National Bank of Romania announced August 4 that it will cut its monetary policy rate to a record low of 3.25%, as inflation continues to fall and the European Central Bank keeps policy loose. Analysts are split on the likelihood of further easing.
The rate cut from 3.5% comes in the wake of persistent weakness in Romania's inflation rate, which dropped to just 0.7% in June. In May, the NBR cut its annual inflation forecast for 2014 from 3.3% to just 2.2%, with reduced electricity prices helping to trim price rises.
The inflation forecast to the end of 2015 was also lowered from 3.3% to 3.0%. Romania is forecast to see a record harvest this year, which is expected to contribute to a further drop in prices.
The NBR said in a statement that it will also pursue adequate liquidity management in the banking system, and maintain the existing levels of minimum reserve requirement ratios on both RON and foreign currency denominated liabilities of credit institutions.
Given the dangers of deflation stalking the EU and forcing the hands of rate setters, the cut was no surprise. A survey of the Association of Financial and Banking Analysts (AAFB) published on July 31 found the majority of respondents expected monetary easing to continue.
However, the timing of the cut was not so clearly agreed. Around half of the analysts surveyed expected the cut to be announced at the NBR's August meeting; others suggested later in the year.
They may both be right. At a press conference following the cut, Governor Isarescu said that judging by the new inflation forecast, the NBR may have room to cut further.
"We read this as supportive for our call that another 25bp rate cut is coming at the next meeting (30 September)," write analysts at ING. However, they also note that such a move would "be less important for the markets since it will probably not bring the usual similar drop of the deposit facility interest rate, the current driving monetary policy rate which now sits at 0.25%."
Capital Economics takes another view, positing that inflation will not suffer to as great an extent as feared. William Jackson also suggests the NBR is more than aware that easing has little effect on overall monetary conditions.
"We suspect that the move was intended as a signal that policymakers are alive to the threat of deflation," he writes. "But with inflation likely to rise over the coming months … as favourable base effects unwind … we think today’s move was probably a one-off rather than the start of a fresh easing cycle."
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