Romania Macro Flash: NBR Cuts Rates by 25bp to a Record Low of 6.25%

5 Mai 2010

CITIBANK EUROPE PLC, DUBLIN - SUCURSALA ROMANIA

In line with the consensus and our projection, the NBR cut its policy rate by 25bp to 6.25%. In a brief statement accompanying the rate decision, the NBR has underlined that it will: (i) ensure an adequate management of liquidity in the banking system; and (ii) keep the existing level of minimum reserve requirement ratios on both leu- and FX-denominated liabilities. The NBR Board also approved the new Inflation Report, which will be released to the public in a press conference scheduled for 6 May 2010.

The large degree of slack in the economy and a stronger currency bode well for disinflation. The uncertainty associated with further improvement in expectations and rising oil prices, however, overshadow the inflation outlook. Against this backdrop, we expect year-end inflation to be around 4.5%YoY, compared with 4.7% in 2009.

The combination of the large negative output gap and relatively benign inflation outlook suggests that there is room for further, albeit limited, rate cuts. While we had initially expected the NBR to end the easing cycle at 6.25%, we believe that the possibility of an additional 25bp rate cut at the June meeting, which would bring the policy rate to 6.0%, looks considerably higher than before. For the reasons we elaborate on in this note, however, the NBR is unlikely to bring the policy rate substantially below 6.0%.

 

Forecast implications

Benign food and service prices continue to support disinflation, helping to bring inflation down to 4.2%YoY in March. In parallel, the large degree of economic slack and a stronger currency bode well for the disinflation process. More importantly, there are nascent signs of an improvement in inflation expectations, which seem to be finally responding to the appreciation of the leu (Figure 2). Looking ahead, we remain concerned about the uncertainty associated with further improvement in expectations and rising oil prices, which may adversely affect price developments. Against this backdrop, we expect year-end inflation to be around 4.5%, compared with 4.7% in 2009.

 

Policy implications

The combination of the large negative output gap and relatively benign inflation outlook suggests that there is room for further, albeit limited, rate cuts. While we had initially expected the NBR to end the easing cycle at 6.25%, we believe the possibility of an additional 25bp rate cut at the June meeting, which would bring the policy rate to 6.0%, looks higher than before. In our view, the NBR is unlikely to bring the policy rate substantially below 6.0% for at least two reasons. First, there doesn't seem to be significant room for lower real interest rates (Figure 3). Second, we believe that the potential problems regarding program implementation, which are likely to emerge towards the end of summer, will lead the NBR to turn more prudent. All in all, the NBR's new inflation report to be released on 6 May will provide important cues about the Bank's assessment of the inflation outlook and the future path of the policy rate.

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