Romania Central Bank Cuts Key Rate By 25 Bps To All-time Low Of 3.75%

Update 01.08.2014 By Bogdan Neagu

Romania’s central bank Wednesday cut the key monetary policy rate by 25 basis points to a record low of 3.75%, in a move aimed at restarting a sluggish lending activity.

In a more aggressive move than analysts' expectations, the central bank also lowered the minimum reserve requirement ratios for both Romanian leu-denominated and foreign-currency denominated liabilities.

Commercial banks will have to leave at the central bank only 12% of the attracted sources in lei, compared with 15% before, and 18% of the foreign-currency liabilities, from 20% currently.

The central bank will enforce the new key rate as of Thursday, while the new reserve requirements apply starting with the January 24-February 23, 2014 maintenance period.

Analysts expected a reduction of the key rate as the inflation in Romania was hovering at all-time lows for the past months, due to sluggish domestic demand and a good farm output in 2013. In November, the annual inflation rate stood at 1.83%, and the central bank estimated the December rate at 1.8%. The country’s statistics institute is due to release the inflation data for December on January 13.

"The latest assessments reconfirm the prospects for a further decline in the annual inflation rate to historical lows in the first half of 2014, given the favorable base effect and the impact of the 2013 bumper crop," the central bank said in a statement. The bank expects the annual inflation rate subsequently remains inside the variation band of +/- one percentage point around the 2.5% target.

Last month, central bank governor Mugur Isarescu also signaled the central bank is ready to reduce the minimum reserve ratios in 2014 to support lending, despite a liquidity excess in the interbank market.

The bank said Wednesday that the lowering of the minimum reserve requirements is aimed at supporting sustainable lending and bringing the reserve requirements mechanism in line with European Central Bank standards in the field.

In 2013, the central bank cut the key rate in four steps, from 5.25% to 4%, but the measures failed to boost private lending.

"The annual rate of change of total loans (in domestic and foreign currency) to the private sector remained in negative territory, despite a relatively improved performance of leu-denominated loans," the central bank said Wednesday.

"The decline in interest rates on new loans to companies and households, the successive monetary policy rate cuts and the improved money market liquidity conditions contribute to the positive dynamics of loans in domestic currency."