Romania cuts rate 25 bps on lower inflation forecast
Romania's central bank cut its policy rate by 25 basis points to 3.25 percent after its latest quarterly inflation report showed that inflation would be significantly lower than expected in May, with the rate now seen below the central bank's midpoint target until mid-2015.
The National Bank of Romania (NBR), which froze rates in March after six consecutive rate reductions, now forecasts annual inflation of 2.2 percent by the end of 2014, down from its previous forecast of 3.3 percent, and 3.0 percent by end-2015, down from 3.3 percent.
Average inflation for 2014 is now forecast at 1.4 percent and 2.4 percent in 2015, below the central bank's target of 2.5 percent, plus/minus one percentage point.
Romania's headline inflation rate fell to a new historic low of 0.66 percent in June from 0.94 percent in May and 1.55 percent in December, with the annual average down from 1.7 percent from May's 2.1 percent.
Behind the fall in inflation were several one-off factors, such as volatile food prices, a nominal appreciation of the leu currency, import prices that reflect subdue euro area inflation, along with the persistent impact of the negative output gap and a decline in inflation expectations, NBR said.
Based on the European Union's Harmonised Index of Consumer Prices (HICP), Romania's inflation rate fell to 1.5 percent in June from 1.8 percent in May.
As in previous months, the central bank said the main risks to its outlook stem from an increase in the volatility of capital flows to Romania in connection with a worsening of investors' risk aversion to emerging market economies from geopolitical tensions, the ongoing cross-border deleveraging and restructuring of some of Europe's banks, "as well as in the context of uncertainty surrounding the impact of possible monetary policy stance adjustments by major central banks worldwide."
In addition to the cut in its monetary policy rate, the NBR also cut the rate on its Lombard lending facility to 6.25 percent from 6.50 percent and the deposit rate will be 0.25 percent.
Romania's Gross Domestic Product expanded by 0.2 percent in the first quarter from the previous quarter for annual growth of 3.9 percent, down from 5.4 percent.
Total credit extended to the private sector in Romania worsened in June due to a steeper decline in foreign currency lending whereas the increase in leu-denominated credit gained momentum and peaked at a five-year high, the central bank said.
The share of foreign exchange loans in total credit narrowed further to 58 percent by the end of June from 62 percent in June 2013, helping improve the transmission of central bank policy.