A Second Romanian Interest Rate Cut
January 5, 2012
The National Bank of Romania Board members have sliced the monetary policy reference rate to 5.75% from 6.0% but left reserve requirements unchanged. This second reduction following a similar 25-basis point drop on November 2, 2011 has been justified as a prudent response to lower CPI inflation and negative implications for growth and financial market conditions of the European sovereign debt crisis. Core CPI inflation stood at 2.6% in November versus a 2011 high of 4.8% in March, and total inflation of 3.4% was down from 4.3% in August. Romania’s Lombard rate was also cut 25 bps to 9.25%. Like the move two months earlier, today’s easing caught a meaningful number of analysts by surprise. Neighboring Hungary has felt the full brunt of the financial crisis, forcing the Magyar Nemzeti Bank there to tighten monetary policy. However, Romania’s currency, the leu, and its bond market have not experienced turmoil such as that felt by Hungary, where political as well as economic circumstances have turned very worrisome.
A statement on the Romanian central bank’s web site observes that “growing uncertainties regarding global and European growth amid a worsened global risk appetite and heightened sovereign debt crisis in the euro zone are hindering the short-term outlook for the overall economic activity in Romania” and then “reaffirms that the gradual adjustment of monetary conditions will not only help resume robust economic growth, but also boost domestic savings, including the aim to support a sustainable external deficit and a lower dependence on external financing.”
During the Great Recession, there were five central bank rate cuts totaling 225 basis points in 2009 and four more reductions by May of 2010 totaling another 175 basis points. The new rate of 5.75% compares with a rate of 6.25% from May 2010 through October 2011 and 10.25% prior to February 2009. The next policy meeting is scheduled for February 2nd.
Copyright 2012, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: National Bank of Romania
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