BNR Keeps Key Rate Steady At 5.25%

Update 05.02.2013 By Bogdan Neagu

Romania's central bank kept its key rate unchanged at 5.25% for the ninth consecutive meeting Thursday, as widely expected, as the country's inflation rate remains above-target, but it took measures to contain the volatility of interest rates on the interbank market.

The central bank also kept its minimum reserve requirement for lenders unchanged at 15% for Romanian leu-denominated liabilities and at 20% for foreign-currency liabilities.

The central bank's board decided to narrow the corridor around the monetary policy rate for the bank's standing facilities to +/- 3 percentage points from +/- 4 percentage points "in order to temper interest rate volatility on the money and banking markets," it said in a statement after the board meeting.

As a result, starting from May 3, the interest rate on the central bank's lending facility, or Lombard, will be lowered to an annual 8.25% from 9.25%, while its deposit facility rate will stand at 2.25% a year, compared with 1.25% previously.

Analysts had widely expected the central bank to keep rates on hold as it is still battling inflation. Romania's annual inflation rate slowed to 5.25% at the end of March, from 5.65% in the twelve months through February, but it is still much higher than the bank's 1.5%-3.5% target range.

In a detailed statement released later Thursday, the central bank said its updated inflation forecast “indicates an improved short-term disinflation outlook, anticipating the return of the inflation rate inside the flat target band in the second half of 2013.”

The bank noted that monthly increases in consumer prices in February and March 2013 stood at historically low levels, reflecting the reduction in inflation expectations.

“Nevertheless, GDP (gross domestic product) remains below potential … pinpointing the improved economic activity due mainly to the favorable evolution of exports and manufacturing. The real annual dynamics of lending to the private sector stayed in negative territory, similarly to credit developments in the euro area and in most countries in the region,” the bank said.

However, with the international financial markets again under strain amid the recent deepening of the eurozone crisis, “the spillover effects on the Romanian economy have proven contained, Romania’s better performance boosting the resumption of capital inflows, which was mirrored by the appreciation of the leu.”

The bank noted that lending and deposit rates resumed their downward trend as interbank rates and government paper yields stayed on a declining path.