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Romania’s Ctrl Bk Unlikely To Ease Monetary Policy „For Some Time” – EIU

The National Bank of Romania, or BNR, is unlikely to relax monetary policy further for some time, despite liquidity problems in the inter-bank market, Economist Intelligence Unit said in a report.
Romania's Ctrl Bk Unlikely To Ease Monetary Policy
26 feb. 2009, 12:03, English

“Despite recent leu volatility, the NBR board decided to lower the monetary policy rate to 10% from 10.25% as of February 5, with the aim of boosting liquidity in the banking sector,” EIU said.

However, “the continued pressure on the leu and underlying inflationary pressures mean that the National Bank of Romania board is unlikely to relax monetary policy further for some time, despite problems of liquidity and high interest rates in the inter-bank market,” EIU added.

Early February, Romania’s central bank cut for the first time in more than a year the key monetary policy rate, by 25 basis points, to 10%. Before that, the central bank raised the key rate in seven steps, from 7% on October 31, 2007 to 10.25% in August 2008.

“Interest rates are expected to come down modestly in 2010, as inflation falls back towards the BNR’s target band,” EIU also said.

The central bank targets a 3.5% inflation rate for 2009, with a one percentage point variation band. It recently said it expects annual inflation to decrease to 4.5% by the end of 2009, from 6.3% in December 2008.

Increases in the key rate in 2007-2008 period were meant to slow the lending expansion, which had a negative impact on inflation and the external deficit.

“Although higher interest rates succeeded in temporarily stabilizing the leu, they initially had little impact on credit growth,” EIU noted.

However, the supply of private lending flattened in 2008’s last quarter as new bank lending virtually dried up.

“The long-term challenge is to engineer a slower rate of credit growth that does not result in a rapid contraction of consumption and investment,” EIU said.

EIU forecasts a 3.7% decrease in private consumption in 2009, followed by a 2.4% increase in 2010, while the public consumption is seen down both in 2009, by 4%, and in 2010, by 0.5%.