The National Bank of Romania (NBR) cut its monetary policy rate by another 25 basis points to 1.75 percent and has now cut it 75 basis points this year following a 50-point cut at an emergency monetary policy meeting on March 20 when it also decided to begin buying government securities in the secondary market, known as quantitative easing.
NBR today also lowered its deposit facility rate by 25 basis points to 1.25 percent, the Lombard facility lending rate to 2.25 percent from 2.50 percent, and said it would conduct further repo transactions and continue to purchase leu-denominated government securities on the secondary market "given the liquidity shortfall on the money market."
It added it would seek to maintain international reserves, including foreign exchange, "at an optimal level."
NBR's monetary policy committee said a new quarterly inflation report, which will be released on June 12, forecasts inflation climbing into the upper half of its target range in the latter part of this year and then remaining around the midpoint amid disinflationary pressures from a deficit of demand.
This rise inflation will follow a moderate decline in the second quarter.
However, NBR also said the "uncertainty surrounding the inflation outlook is unusually elevated" and the severe economic impact from the pandemic, which is likely to "abruptly change the Romanian economy's path in mid-2020, is now beginning to be reflected in economic data.
Romania's inflation rate fell to 2.7 percent in April from 3.1 percent in the previous two months, mainly due to disinflationary base effects and the plunge in oil prices along with a removal of special excise duties on motor fuels.
NBR targets inflation of 2.5 percent, plus/minus 1 percentage points and in February it lowered its 2020 inflation outlook to 3.0 percent from an earlier 3.1 percent. For 2021 NBR had forecast inflation of 3.2 percent.
Romania's economy slowed visibly to growth of 2.4 percent in the first quarter, on an annual basis, from 4.3 percent in the previous quarter despite what NBR said was particularly robust growth in the first two months of the year.
Compared with the fourth quarter of 2019, Romania's gross domestic product grew only 0.3 percent in the first quarter, down from 1.2 percent growth.
NBR confirmed its decision from March that it was not holding scheduled monetary policy meetings but its monetary policy committee would continue to hold meetings "whenever necessary" given the elevated uncertainty around economic and financial developments.
The National Bank of Romania issued the following statement:
"In its meeting of 29 May 2020, the Board of the National Bank of Romania decided the following:
- to cut the monetary policy rate to 1.75 percent per annum from 2.0 percent per annum starting 2 June 2020;
- to lower the deposit facility rate to 1.25 percent per annum from 1.50 percent per annum and the lending (Lombard) facility rate to 2.25 percent per annum from 2.50 percent per annum;
- to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions;
- to further conduct repo transactions and continue to purchase leu-denominated government securities on the secondary market.
The global economy and its outlook have been strongly affected by the major adverse impact and the unprecedented uncertainty generated by the coronavirus pandemic, alongside the containment measures imposed by the authorities. With a view to cushioning the fallout, many central banks in the advanced and emerging economies, the ECB and central banks in the region included, took measures to ease the monetary policy stance and improve financial conditions, consisting in policy rate cuts, purchases of financial assets and liquidity provision via repurchase transactions, even over the long term.
Likewise, the National Bank of Romania’s response in this context was prompt. Specifically, the NBR Board convened for an emergency meeting on 20 March 2020 and adopted a package of measures aimed at mitigating the economic impact of the pandemic, but also at consolidating liquidity in the banking system so as to ensure the smooth functioning of the money market and of other financial market segments, as well as the smooth financing of the real economy and the public sector. The package included a cut in the monetary policy rate by 0.50 percentage points, to 2.00 percent, and the narrowing of the corridor defined by interest rates on standing facilities to ±0.5 percentage points from ±1.0 percentage point, which implied leaving the deposit facility rate unchanged at 1.50 percent and lowering the lending facility rate by 1 percentage point to 2.50 percent. In addition, it was decided that the NBR should conduct repo transactions for providing liquidity to credit institutions, as well as purchases of leu-denominated government securities on the secondary market.
On the domestic front, the severe economic impact of the coronavirus pandemic – likely to abruptly change the Romanian economy’s path in mid-2020 – began to reflect in the latest statistical data.
The annual CPI inflation rate remained unchanged in March at 3.05 percent and then fell to 2.68 percent in April (from 4.0 percent in December 2019). Behind its decline versus December 2019 stood disinflationary base effects and the plunge in the oil price, alongside the removal of the special excise duty on motor fuels.
The annual adjusted CORE2 inflation rate (which excludes from the CPI inflation administered prices, volatile prices, and tobacco product and alcoholic beverage prices) tended however to increase slightly during the first four months of 2020, contrary to forecasts, reaching 3.7 percent in April from 3.66 percent in December 2019. The evolution owed to changes in consumption structure brought about by social distancing measures, associated also with probable disruptions and cost increases in production and supply chains, overlapping persistent demand-pull and wage cost-push inflationary pressures.
Average annual CPI inflation rate and average annual inflation rate calculated based on the Harmonised Index of Consumer Prices dropped to 3.7 percent in March and 3.6 percent in April from 3.8 percent and 3.9 percent respectively reported December 2019 through February 2020.
According to preliminary data, economic growth slowed down visibly in 2020 Q1 to 2.7 percent from 4.3 percent in the previous quarter, in spite of remaining particularly robust in the first two months of the year. At the same time, the trade deficit posted a markedly faster widening amid a steeper decline in exports than in imports of goods and services. Consequently, the dynamics of the current account deficit regained momentum, the improvement in the primary and secondary income balances notwithstanding.
Financial market conditions improved after the adoption of the monetary policy decisions and after overcoming at end-March the peak of tensions generated by the COVID-19 crisis. Key interbank money market rates witnessed a significant downward adjustment in the closing 10-day period of March and afterwards continued to decline gradually, while interest rates on leu-denominated government securities went down progressively, amid the increased volume of liquidity injected by the NBR through bilateral repo operations and through purchases of leu-denominated government securities on the secondary market. At the same time, the EUR/RON exchange rate saw lower fluctuations, moving in a narrow range, inter alia amid an improvement in global financial market sentiment.
Lending remained relatively strong in March, before coming under the influence of the pandemic crisis in April. Thus, the stock of credit to the private sector contracted slightly, its annual dynamics slowing to 5.7 percent from 6.9 percent a month earlier. The share of domestic currency loans in total private sector credit narrowed slightly to 67.1 percent against 67.6 percent in December 2019.
In today's meeting, the NBR Board examined and approved the May 2020 Inflation Report, which incorporates the latest available data and information. The current macroeconomic forecasts were made under extremely uncertain and highly difficult conditions, amid multiple unknowns concerning the evolution and implications of the pandemic and the related measures. The new scenario shows a change in the envisaged trajectory of the annual inflation rate, especially in the second part of the forecast horizon. Specifically, after having posted a moderate decline in 2020 Q2, the annual inflation rate is expected to climb again in the upper half of the variation band of the target in the latter half of this year, before repositioning itself and remaining around the mid-point of the target until the end of the projection horizon, amid disinflationary pressures from the aggregate demand deficit.
The uncertainty surrounding the inflation outlook is unusually elevated, given the unprecedented nature of such an economic shock domestically and internationally, implying an abrupt lockdown on businesses and sectors, but also consumer behaviour shifts. Major sources of uncertainty are also the speed of economic recovery following the gradual removal of containment measures and the effectiveness of support programmes and actions addressing companies and households. On the domestic front, significant uncertainties relate to the fiscal and income policy stance, as well as to the functioning of the monetary transmission mechanism in the context of legislative initiatives targeting the banking system. Increased uncertainty and risks also stem from the euro area and world economy contraction and from the international financial market developments amid the coronavirus pandemic crisis.
In today’s meeting, based on the currently available data and assessments, but also in light of the extremely high uncertainty, the NBR Board decided to cut the monetary policy rate to 1.75 percent per annum from 2.0 percent per annum starting 2 June 2020. Moreover, it decided to lower the deposit facility rate to 1.25 percent per annum from 1.50 percent per annum and the lending (Lombard) facility rate to 2.25 percent per annum from 2.50 percent per annum. Furthermore, the NBR Board decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions. Given the liquidity shortfall on the money market, the Board decided to further conduct repo transactions and continue to purchase leu-denominated government securities on the secondary market, keeping financial market stability. Moreover, the central bank will seek to maintain international reserves, forex ones included, at an optimal level.
The NBR Board decisions aim to ensure and preserve price stability over the medium term in a manner conducive to achieving sustainable economic growth and amid safeguarding financial stability.
The new quarterly Inflation Report will be published on the NBR’s website at 5:00 p.m. The account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the NBR’s website on 12 June 2020, at 3:00 p.m.
Given the elevated uncertainty surrounding economic and financial developments, the NBR Board decision to suspend the previously announced calendar of monetary policy meetings remains in place and monetary policy meetings will be held whenever necessary."
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