“It is important that the BNR is signaling a reduction in interest rates via a monetary policy rate cut cycle. Normally, this monetary policy reduction cycle should induce a downward trend for the interests of loans and deposits in lei, thus making the leu loans more attractive, especially now that financing resources in foreign currency have become more expensive and harder to get,” said Ionut Dumitru, chief economist of Raiffeisen Bank.
Non-governmental lending saw annual growth of 4.1% in real terms in November, as a result of the increase by 2.3% of leu-denominated loans and by 8.7% of the foreign currency component calculated in lei (calculated in euros the foreign currency lending rose by 7%).
“One may say that the BNR is trying to stimulate lending in domestic currency by cutting the monetary policy rate. Anyway, a further 50 basis points is needed to be able to see an affect,” comments Florian Libocor, BRD-SocGen’s chief economist.
Relaxation should first show in the interest rates on deposits; it is necessary that the monetary policy easing continue in order to alleviate pressures on these interests and gradually reduce financing costs.
“Banks’ competition over cash is currently preventing the reduction of the cost of funds attracted. Further cuts of the monetary policy rate are needed, as well as extension of maturities of repo operations to stabilize deposit interests,” explains Dan Bucsa, UniCredit Tiriac Bank chief economist.
Judging from the central bank’s inflation forecast, the real monetary policy interest rate is 2.75% at the moment, which is very high for the current economic situation. As a result, the monetary policy rate might go down to less than 5.5% by the end of the year, Dan Bucsa believes.
“The purpose of the monetary policy rate cut is to reduce the cost of lending, both for the real economy and for the Treasury, and is a good decision given the consolidation of the disinflationary trend and the risks of a slowdown of the economic growth in 2012 as a result of foreign pressures,” says Melania Hancila, chief economist of Volksbank.
The impact of the interest rate adjustments operated by the central bank is usually felt a few quarters later but the current easing cycle probably came as a response to the decline of the financial deleveraging in Europe that will likely make an impact on Romania, considers Vlad Muscalu, ING Bank economist.
He anticipates a further reduction by 25 basis points to 5.5% this quarter, which will probably be the last rate cut of the year.
Analysts believe that the impact of the central bank’s decision on the trend of the exchange rate will be non-existent, as the market already priced it in and Romania has one of the highest positive real interests in the EU.
In theory, a cut of the leu interest should lead to a depreciation of this currency, as its yield/attractiveness is lower.
“I don’t think a decision of this magnitude, considering the progress Romania has made towards correcting its imbalances would make a direct impact in terms of currency depreciation,” explained Catalina Molnar, RBS Bank senior economist.
UniCredit Tiriac’s Bucsa, too, considers that there is only a very slight risk for a depreciation of the leu because the central bank’s decision came as no surprise. In addition, the exchange rate is largely influenced by the investor sentiment towards currencies in Central and Eastern Europe rather than the leu yields, which are high compared with the region average.
Central bank’s estimates point to an annual inflation rate of close to the 3% target in December, as it had previously forecast and confirm again the deceleration of the inflation in the coming months.
“I think BNR’s decision was based on the low inflation at the moment, on the inflation decline prospects to 2-2.5% in the first part of 2012 and on the high probability that will attain its inflation target in 2012,” Raiffeisen’s Dumitru said.
However, even though the inflation will temporarily fall to new record lows in the first part of this year, the unfavorable base effect will drive annual inflation up in the second part of the year. Add international market turmoil on top of that and the central bank’s room to maneuver is thus limited, Dumitru added.
RBS Bank’s Catalina Molnar said that by making the decision to cut the monetary policy rate by merely 0.25%, the central bank adjusted the monetary conditions taking inflation trend into account, at the same time continuing to stimulate savings considering the positive real interest remained high.
(English version by Loredana Fratila-Cristescu)