BNR on Wednesday decided to cut the key rate to 6%, after keeping it at 6.25% a year, thus signaling the start of a monetary policy easing cycle, which should help the economy overcome the threat of recession.
BNR’s board of directors said it expected its signal to show in the interests charged by banks for leu loans, a message that is in line with the new lending rules put in place to temper lending in euros. BNR also urges banks to stimulate savings by offering “adequate” interest rates to reduce the “the dependence of the national economy on external funding.”
Entrepreneurs had been waiting for signals from BNR to stimulate lending for eighteen months, even more so lately when the problems in the euro zone worsened.
“Maybe BNR wanted to give a boost, steer towards a certain direction, but it’s the same indecision. It’s a boost, and actually it isn’t,” commented Dan Sucu, chairman of furniture maker Mobexpert. “You don’t answer an over three percent inflation decline with a 0.25% rate cut. What BNR did will have no influence on the market. BNR has never had an entrepreneurial position. Entrepreneurs do not move in small steps, they have confidence.”
Bank analysts, many of them surprised by BNR’s decision, believe that a mere 0.25 point cut is more like a signal than anything else, so that it is important for the relaxation process to continue and show in loan interests.
BNR’s reluctance to cut the key rate so far had been repeatedly explained as being a way to avoid the risk of encouraging speculations against the exchange rate of the leu.
“Even though the leu depreciated after the announcement because of the surprise, the risk of a surge of the exchange rate is limited. The interest cut is not that significant to cause investors to change their opinion,” says Dan Bucsa, chief economist of UniCredit Tiriac Bank.
BNR announced a higher reference exchange rate by 0.25 bani (1 leu = 100 bani) of RON4.3460/EUR on Wednesday; by the end of the of interbank forex market session the exchange rate had reached RON4.35/EUR.
Melania Hancila, chief economist of Volksbank does not expect a significant depreciation of the leu after this decision, either, because investors are more concerned about macroeconomic fundamentals and the euro zone debt crisis’ potential impact on Romania, rather than yields, and risk aversion is what determines investment decisions.
The domestic currency remains attractive, as the interest in real terms in Romania is still high, says Ionut Dumitru, chief economist of Raiffeisen Bank, adding that many central banks in Europe have negative real interest rates at the moment.
Analysts expect further relaxation of the monetary policy rate in the first half of 2012.
BCR, the largest bank by assets, expects a rate cut to 5.5% in March 2012, while UniCredit Tiriac sees two more cuts in the first half of 2012, which will take the rate to 5.5%.
“BNR sent an important signal to the market by cutting the monetary policy rate by 0.25%. We believe further cuts will follow next year,” said Catalina Molnar, senior economist of RBS Bank. “In our opinion, considering the prospects of moderate inflation for next year and the demand deficit, a rate cut process had to start, otherwise financing conditions in real terms would have become too restrictive for the economy.”
(English version by Loredana Fratila-Cristescu)