Analysts React To BNR's Rate Cut Decision: Too Little, Too Late

11.02.2011 ZF English

The central bank’s decision to cut its main interest rate by a quarter-point to 6% comes rather late and its effects on bank lending might pass unnoticed, analysts said.

"By itself, the decision to lower the rate by 25 basis points doesn't carry too much weight on loan interests. It's not that big of a deal," said Ionut Dumitru, chief economist at Raiffeisen Bank Romania.

However, the central bank's decision signals the beginning of a new monetary policy cycle in the next months that could entail new rate cuts and lower reserve requirements for local lenders, Dumitru told Mediafax Wednesday.

"The interest rate on leu-denominated loans should have been at 5% for some time now.

Isar added that, rather than the start of a more relaxed policy, the lower rate could be a defensive move from the central bank against recent accusations that its "uninspired" monetary stance is fueling the prolonged recession.

"The recent introduction of more lending restrictions and the subsequent discussions around them suggest the 25bps rate cut is a defensive gesture, not a change of mentality," he said.

Economist Florin Citu estimates the rate cut will not have much effect on the real economy.

"A monetary policy decision below 100bps in either direction has no weight on the real economy, because the main distribution channel for such decisions, namely bank lending, is currently short-circuited," Citu said. "The other distribution channel, the exchange rate, won't work as long as the central bank refuses to utilize it," he added.

The central bank Wednesday lowered its main interest rate by a quarter of a point to 6% a year, the first cut in the last year and a half, in a move that surprised analysts.

"Naturally, the decision is fairly surprising. The central bank seemed worried about external pressures that could affect the leu and fuel a higher inflation, and these pressures don't appear to have gone away," said Vlad Muscalu, economist with ING Bank Romania.

Although the lower interest rate is a positive signal for the market, its actual impact is rather limited, because of the weak lending demand, Muscalu said.

(English version by Florentina Dragu)