Romania's c-bank likely to hold key rate at 1.5% until end-2021 - Erste

"We expect the central bank to ease its policy stance by initially cutting reserve requirement ratios (RRR) for RON liabilities, followed by loosening liquidity management and perhaps asymmetric changes in the standing facilities corridor," Erste said in an e-mailed short note on Romania.

The amplitude and timing of the monetary policy accommodation is likely to be correlated with the size and pace of the upcoming fiscal consolidation which, in its turn, is dependent on the shape and speed of the post-pandemic economic rebound, Erste analysts said.

Reductions of reserve requirement ratios for FX liabilities are policy neutral as new retail loan origination is almost exclusively granted in local currency and such decisions are likely to be correlated with the size of central bank’s FX reserves and the government borrowing plans in hard currency from the domestic market, the analysts added.

Romania's consumer prices rose by 2.24% year-on-year in October, compared to an increase of 2.45% in September, according data published on Wednesday by the office of national statistics.

In Erste's view, Romania's inflation should remain inside the central bank's target range of 2.5%±1pp for the eight-quarter-ahead monetary policy horizon. Erste's year-end forecast stands at 2.1% year-on-year for 2020 and 3.1% year-on-year for 2021.

Core 2 inflation (CPI less administered, volatile food and fuel, tobacco and alcohol prices) inched down to 3.6% year-on-year in October from 3.7% September, in line with Erste's expectations.

Analysts said they expect core inflation to remain elevated over the following two months, though dropping slightly below the upper limit of the central bank’s target band of 3.5% in December.

In August, Romania's central bank cut its monetary policy rate to 1.5% from 1.75% as part of a package of measures aimed at mitigating the impact of the coronavirus crisis on households and companies.

The central bank expects 2.7% inflation at end-2020 and 2.5% inflation at the end of 2021, according to its latest inflation report issued in August.

(1 euro=4.8678 lei)