NBR cuts monetary policy rate from 8.75% to 8%

The National Bank has managed to take most analysts by surprise with its decision to reduce the monetary policy rate from 8.75% to 8%, although it had become obvious that NBR’s wish to consolidate the beacon role of the rate was already at odds with the situation on the market, where interbank rates were already much lower.
“The announced cut does nothing but show a move to rally to the market and to the inflation, because it was obvious that the real monetary policy rate had become very high. We will be able to better analyse NBR’s decision in relation to the volume of purging during the future auctions. If the partial purging continues in spite of the rate decline, the new rate will be meaningless to the market,” comments Mihai Bogza, Bancpost chairman and former NBR vice-governor.
He believes it is “fairer” for the NBR to cut the rate and purge the excess liquidity in full to really send a signal to the market, rather than maintain a barely relevant interest, while the purging is done only in part. “NBR’s Board of Governors has decided to adjust the overall monetary conditions in accordance with the new context by cutting the monetary policy rate from 8.75% to 8%, by exerting, through market operations, a liquidity control adequate to the conditions on the financial markets and by maintaining the current level of the minimal mandatory reserve rates,” the central bank announced after the meeting of its Board of Governors last Friday.
The NBR explains its decision by mentioning the factors that had determined “a strengthening of the restrictiveness of the overall monetary conditions,” even in the absence of decisions of the central bank: the increase in the real margin of the monetary policy rate and the faster than anticipated RON appreciation, partly as a result of the larger capital inflows. The National Bank notes that the situation on the monetary and forex markets over the last few months was showing liquidity and interest rate levels that induced a fast-paced strengthening of the domestic currency, which greatly contributed to the slowdown in the increase in aggregate prices.
“An interest decline of such magnitude could generate withdrawals of profits from the forex market, which would drive the exchange rate up, although only a little bit, considering the interests on the interbank monetary market had been low for a while now,” comments Radu Craciun, chief analyst of ABN Amro Romania.
He suspects NBR’s decision was also caused by an inflationary rate that was much lower than expected in January, probably standing at 0.2-0.3%. The official figure is to be released today.
“This could be a reason for the NBR to sigh in relief, considering the first few months after the accession of the countries that joined the EU in 2004 came with significant price increases,” Craciun says.
Ionut Dumitru, head of Raiffeisen Bank’s research department believes NBR’s decision reflects more optimistic expectations of the inflationary trend over the coming period.
“The decision is no surprise to me. It’s obvious the inflation in January is quite low. The 2007 and 2008 inflationary projections are probably lower, compared with the levels announced last autumn,” Dumitru says.