UPDATE 2 - Romania C-Bank Cuts Monetary Policy Rate to 8.0%, Analysts See More Cuts in H1’10

Analysts polled by SeeNews on Monday said they expected the BNR to cut its monetary policy rate by 50 basis points to 8.0% to reflect continuing disinflation and frozen bank lending.

The central bank said in a statement it also decided to maintain the current ratios of minimum reserve requirements on both leu-denominated and foreign currency-denominated liabilities of Romanian banks.

“We expect the BNR to cut further the monetary policy rate at the next meetings given that inflation rate would continue to fall (to around 3.5% by March 2010 according with our expectation, from 5.0% currently) and economic activity would remain weak. We expect the key interest rate to fall to around 7.0% by the middle of next year,” Raiffeisen Research said in a note to investors.

ING analysts Nicolaie Alexandru-Chidesciuc and Vlad Muscalu said they expect the rate to fall below 7.0% in the first part of 2010.

Since the beginning of the year BNR has cut its key rate four times: to 10.00% from 10.25% in February, to 9.5% in May, to 9.0% in June, and to 8.5% last month. Romania's annual consumer price inflation slowed down to 4.96% in August from 5.06% in July and 5.86% in June.

BNR also said in the statement it will ensure an adequate management of liquidity in the banking sector in order to consolidate monetary policy transmission channels.

“This means that money market interest rates should fall also in line with the monetary policy rate. Also, we expect the government bond yields to decrease in the next period. The decision to cut the key interest rate should have no impact on the exchange rate,” Raiffeisen Research added.

The BNR board reiterated that the central bank will continue to closely monitor domestic and global economic developments so as, by using its available instruments, to ensure the fulfillment of its objectives of achieving and maintaining price stability in the medium term as well as financial stability.

"The monetary policy stance stayed prudent, with the BNR permanently calibrating its broad monetary conditions with a view to consolidating the convergence of inflation towards medium-term objectives and ensuring the conditions for a sustainable revival of lending activity," the Romanian central bank said.

It also said that a firm and consistent implementation of the macroeconomic policy mix – monetary, fiscal and income - and the structural reforms agreed under a 20 billion euro financing arrangement with the European Union, the International Monetary Fund and other international financial institutions are essential for achieving a further sustainable disinflation, maintaining financial stability and for a lasting and sustainable relaunch of economic activity.

The BNR added that starting September 30, the rate on the deposit facility will be lowered to 4.0% per annum from 4.5% and the rate on the lending facility (Lombard rate) will be 12% per annum versus 12.5%.

At the same time, the penalty rate for deficits of leu-denominated minimum reserve requirements will drop to 18% from 18.75% starting with the October 24-November 23, 2009 maintenance period.