“Given the subdued inflation outlook, we wouldn’t be surprised to see a further cut or two over the coming months,” the research firm wrote in a note Tuesday.
“We have penciled in one more 25 basis-point rate cut, to 2.5% at the next (monetary policy council) meeting in January.”
Romania’s central bank board cut the key monetary policy rate by 25 basis points to a record low of 2.75% earlier Tuesday. It also reduced the minimum requirement ratio for hard currency deposits to 14% from 16%, while keeping the requirements for leu deposits at 10%.
The research firm said today’s decision is unlikely to have a significant impact on overall monetary conditions. “Instead, we suspect that the move was a signal to show that policymakers are alert to the prospect of weaker inflation following the recent sharp slide in oil prices.”
Capital Economics notes that, following last month’s decision to lower interest rates, central bank governor Mugur Isarescu had suggested that further easing was more likely to come via reductions in leu-denominated required reserve ratios than via cuts in interest rates.
“Nonetheless, policymakers appear to have been spurred into more aggressive action by the softening inflation outlook. The headline rate, at 1.5% year-on-year in September, is only just within the central bank’s 1.5-3.5% inflation tolerance range. Moreover, the recent sharp slide in oil prices means that inflation may start to ease again over the coming months.”
The central bank has also cut again its inflation forecast to 1.5% (from 2.2%) in 2014 and 2.2% (from 3%) in 2015.
Nonetheless, policymakers appear to be increasingly dovish on the outlook for inflation and, as such, one or two more rate cuts could still be on the cards, Capital Economics said in its research note.
“But irrespective of whether interest rates are cut further or not, the big picture is that inflation is likely to remain low, allowing monetary policy to stay loose.”