Romania’s central bank on Monday, July 1, cut by 25bps to 5% its monetary policy interest rate for a first time since February 2012, the monetary authority said. The move was announced as imminent by governor Mugur Isarescu several months ago.

The central bank quoted disinflation as the main ground for the cut, while on the other hand strongly recommending commercial bankers to unlock lending. Nonetheless, with the monetary transmission mechanism hardly functioning, the central bank’s rhetoric is debatable. The rate cut is rather aimed at bringing the monetary policy rate in line with the market than pursuing any particular policy.

No other elements of the monetary policy were changed. The interest rate corridor had already been narrowed from +/-4pps to +/-3pps, effective as of May 3 – with the view of reducing the interest rate volatility on the money market. The corridor was maintained in the July meeting. The required reserve ratios were also kept unchanged at 15% for local currency liabilities and at 20% for foreign currency liabilities.

Banks should refrain from further cutting the deposit interest rates and should consider instead decent loan interest rates, governor Isarescu said on May 8. He argued that with a 15% interest rate on local currency loans naturally the demand for credit is weak.

The central bank has no reason to lower the required reserves ratios, Isarescu added. There is no reason to stimulate deleveraging by releasing even more funds, he explained. At the same time, there is no reason to fear deleveraging since it actually means paying back debts, Isarescu said.

Romania’s central bank has cut its end-year inflation forecast to 3.2% y/y under the latest Quarterly Inflation Outlook released on May 8, down from 3.5% y/y forecasted in February. Actual inflation will come within the targeted band of 2.5% +/- 1pps at an earlier moment, probably in September.