BNR cuts monetary policy rate for the third time this year – 4.25 pc

Also, the central bank management decides to maintain the existing levels of minimum reserve requirement ratios on both RON and foreign currency-denominated liabilities of credit institutions. According to BNR governor, Mugur Isarescu, banks will have to diminish interest rates for loans in lei following this decision.
National Bank of Romania continues the series of decisions within the meaning of easing monetary policy. In the yesterday meeting, the Board of BNR decided to lower the monetary policy rate to 4.25 percent per annum from 4.5 percent starting today October 1, a press release informs. This decision is in line with analysts’ estimates. “This trend, in line with the central bank’s forecasts in the latest Inflation Report, strengthens the favourable outlook for the annual inflation rate to fall below the 2.5 percent target in the forthcoming period,” said BNR.
Also, the central bank management decided to pursue an adequate liquidity management in the banking system and to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
BNR reiterates that it will closely monitor domestic and global economic developments so as, via the proper calibration of the monetary policy conduct and the adequate use of its available tools, to ensure price stability over the medium term and financial stability.
Mugur Isarescu stated yesterday that banks will have to diminish interest rates for loans in lei following BNR’s 1 point cut in the key interest rate between July and September to 4.25 percent, considering the latest interest rate cut was by only 0.25 percent, so as not to lower deposit bonuses. According to the BNR governor, lowering prices for loans in lei is not enough and monetary policy has had a delayed and moderate effect on the bank loan policy, compared to the much more rapid transmission to the interbank market and interest rates for government bonds.
He pointed out that the moderate and delayed transmission of monetary policy on the market will not disrupt the central bank’s lax monetary policy interest rate.
Earlier in August, the BNR slashed the rate by 0.5 percentage points, from 5 percent, which makes the most recent decision the third such move made by BNR this year. The first drop, of 0.25 percent, happened in July, and came after almost a year of keeping the key interest rate flat.
“The ongoing adjustment of monetary conditions is aimed at preserving medium-term price stability, in line with the BNR’s flat target of 2.5 percent, while also paving the way for the sustainable recovery of lending to the private sector, restoring confidence and achieving lasting economic growth.”, the central bank underlines in the press release. In line with the announced calendar, the next BNR Board meeting dedicated to monetary policy issues is scheduled for 5 November 2013, when the new quarterly Inflation Report is to be examined.
Financial analysts believe the key interest rate might drop even further to 4 percent in December 2013, Mediafax notes. Raiffeisen RESEARCH Romania expected the central bank to be more aggressive and to reduce the key rate by 50 bp, according to a press release. “In our baseline scenario, we expect the monetary policy rate to bottom out at 3.5 percent. Following today’s (ed.note yesterday) decision, this level might be reached in February assuming a 25 bp cut at each of the next three monetary policy meetings”, said the Austrian analysts.
Decision had no material impact on the exchange rate and on the bond market.
In the letter of intent submitted to IMF, the central bank has committed not to lower the interest rate unless inflation returns to the targeted level or market conditions are unfavorable, which means the next interest rate cut might be performed only in November, at the last monetary policy session of the year, when the third quarter inflation report is approved.
The National Banks has also agreed with the IMF to cut back inflation until it reaches the short-term target level of 2.5±1 percent and maintains it.
According to financial analysts, the minimum mandatory reserves for liabilities in lei might be maintained at 15 percent until the end of 2013, and then drop to 12 percent by the end of next year. Minimum mandatory reserves for liabilities in foreign currency might remain at 20 percent both this year and in the following year, but some analysts are of the opinion they might drop to 15 percent by the end of 2014. Interest rates on the interbank market have actually experienced a pronounced decrease, thus enabling the decrease in interest rates for loans in euro. This would allow Romanians to take loans in lei more frequently and eliminate the currency risk.
FDI increased last year, despite negative estimates
Foreign direct investment (FDI) net flow in 2012 stood at EUR 2,138 million, of which EUR 795 million – equity stakes (37.2 percent) and EUR 1,343 million – net credit from foreign investors (62.8 percent), up 18.7 percent, according to the statistical survey conducted by BNR and the National Institute of Statistics, while the initial estimates indicated a 11 percent decrease compared to 2011.
FDI stock as of 31 December 2012 amounted to EUR 59,126 million, of which EUR 39,266 million – equity stakes, including reinvested earnings (66.4 percent) and EUR 19,860 million – net credit from foreign investors (33.6 percent). By economic activity, the bulk of FDI went to manufacturing (31.3 percent of total), out of which the largest recipients were: oil processing, chemicals, rubber and plastic products (6.7 percent of total), transport means (5.4 percent), metallurgy (4.9 percent), food, beverages and tobacco (3.7 percent) and cement, glassware, ceramics (2.8 percent). Apart from industry, activities that also attracted significant FDI were financial intermediation and insurance (18.5 percent of total FDI stock), trade (11.4 percent), construction and real estate transactions (9.2 percent), and information technology and communications (4.8 percent).
Tangible and intangible fixed assets stood at EUR 27,412 million at end-2012 and held 46.4 percent of total FDI, thus leading to considerable foreign direct investment stability.
From a territorial point of view, FDI went mainly to Bucharest-Ilfov region (60.6 percent). Other development regions benefiting from significant FDI inflows were: the Centre region (7.8 percent), the West region (7.6 percent), the South-Muntenia region (7.2 percent), and the South-East region (5.5 percent). The breakdown of FDI stock by country of origin took into account the country of origin of the direct holder of at least 10 percent in the share capital of resident FDI enterprises in Romania.
Top 4 countries by share of FDI stock as of 31 December 2012 were the Netherlands (22.4 percent of the FDI stock at end-2012), Austria (18.5 percent), Germany (11 percent) and France (8.9 percent), the same ranking since 2009.
The flow of equity stakes into FDI enterprises amounting to EUR 2,676 million is divided into greenfield, mergers and acquisitions and corporate development. In 2012, out of the total FDI equity flow, 99.5 percent (EUR 2,663 million) went to corporate development, only EUR 18 million were destined to greenfield investment and mergers and acquisitions had a negative influence of EUR 5 million. The accumulation of foreign direct investment in enterprises established as greenfield investment companies, referred to as greenfield enterprises, was highlighted in order to assess the lasting impact of greenfield investment on the economy. The activity of direct investment enterprises as a whole had a positive impact on Romania’s foreign trade, its contribution to total exports and total imports of goods standing at 70.3 percent and 62.6 percent respectively.

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