Central Bank Rate Cuts in Russia and Romania

September 29, 2009

Following Hungary’s 50-basis point rate cut on Monday, similar-sized reduction were implemented today in the Russian refinancing rate to 10.0% and the Romanian monetary policy rate to 8.0%.

  • The Central Bank of the Russian Federation had implemented six earlier rate cuts, two by 25 bps in mid-September and early August and one each of 50 bps apiece in April through July.  The sum of these earlier reductions plus today’s seventh move add up to 300 basis points, more than offsetting two 100-bp increases last November.  Russia has very poor economic fundamentals: an on-year GDP contraction of 10.9% in 2Q, CPI inflation of 11.6% as of August, a fiscal deficit of about 8% of GDP, and an 8.1% jobless rate.  Net energy exports give the economy a current account surplus.
  • Analysts had widely anticipated the National Bank of Romania’s move today but are becoming more concerned that exchange rate vulnerability may start constraining future monetary relief.  There have been five Romanian rate cuts: 25 bps in early February, 50 bps on June 5, another 50 bps on June 30, a third 50-bp cut on August 4, and today cut, which combine for a reduction of 225 basis points from a peak of 10.25% maintained in 2H08 and January of this year.  CPI inflation of about 5% is still a half-percentage point higher than where officials wish such to be at the end of this year, and the fiscal deficit has widened sharply.  A statement from officials revealed little information and was vague about future policy.  Romanian monetary policy remains comparatively tight, so 8.0% probably does not represent a cyclical floor.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.


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