Romania Central Bank Leaves Key Rate Unchanged At 3.5%

Update 03.28.2014 By Florentina Dragu

Romania’s central bank left its key rate unchanged at a record low of 3.5% Friday, ending an eight-month long monetary easing cycle, amid higher inflationary pressures.

The decision was in line with market consensus as analysts expected the rate freeze due to increased inflationary pressure largely stemming from a new tax duty on fuels and energy price deregulation. Recent developments in emerging markets and capital flow volatility also add up to the pressure.

The central bank has lowered its main lending rate by a cumulative 200 basis points since July 2013.

The bank also maintained its minimum reserve requirements unchanged at the Friday meeting, as interbank liquidity remains high.

The minimum requirements were kept at 12% for Romanian-leu denominated liabilities and at 18% for foreign currency liabilities.

“Interbank liquidity has been fluctuating largely on the surplus side and the interest rates in the money market, particularly the short-term rates, have remained below the monetary policy rates,” the central bank said in a detailed statement later Friday.

It said the comfortable liquidity levels, as well as the declining interest rates on new loans following the bank’s successive rate cuts will further boost recovery in the private lending sector.

“However, private sector lending dynamics remain weak, reflecting a significant drop in foreign-currency loans,” the statement noted.

The central bank reiterated its forecast for a subdued inflation rate in the next months, while warning of upside risks from external factors, including a faster deleveraging process from foreign banks.

“The latest assessments reconfirm the prospects for the annual inflation rate to remain subdued over the months ahead, in the vicinity of historical lows,” it said.

Romania’s annual inflation eased to a record low of 1.05% in February, reflecting a 2.2% annual decline in food prices.

The central bank targets an inflation rate of 2.5% in 2014, plus/minus one percentage point around the band. Last month, the bank revised upward its year-end forecast to 3.5% from 3% previously, citing external uncertainties and upside pressure from higher excise duties.