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Bucharest
December 4, 2021
BUSINESS ECONOMY

Romania cuts its monetary policy rate

The National Bank of Romania, which is the country’s central bank, decided to cut its monetary policy rate by 25bps to 1.5% in its latest meeting on 5th August. It also decided to lower the deposit facility rate to 1% from 1.25%, and the lending rate to 2% from 2.25%. The existing reserve requirements for credit institutions on both local and foreign-denominated liabilities were left unchanged.

These decisions were a response to the ongoing pandemic which has led to a depression of activity all over the world, and certainly in Europe. Even though economies have begun to recover since May after lockdown measures were gradually lifted, the speed of any recovery is uncertain, due to the unknown evolution of the pandemic and the associated measures and restrictions which may need to be placed if it begins to spiral out of control again. It has therefore been a theme across economies where fiscal and monetary policy have been accommodative during this time, including by the ECB and other European central banks.

Retail and motor vehicle sales saw a rebound in May, with the large decline seen in April being narrowed somewhat, while construction rose at a faster pace in the first two months of Q2. Most sectors which went online, with online gambling sites offering roulette online and other games as the prime example, have managed to stave off the worst of the crisis so far.

At the same time, the annual CPI inflation rate also continued to fall due to lower demand, with the May number at 2.26% from 2.68% in April. It ticked up to 2.58% in June, due to base effects as well as an increase in oil prices. It is still on a downward trajectory when compared to the 3.05% inflation rate seen at the end of the previous quarter, due to the large decline in oil prices when seen annually.

Adjusted CORE2 inflation (which excludes administered prices, volatile prices, tobacco and alcoholic beverages from CPI) saw a very small fall in June to 3.7%, from 3.86% in March. This is a result of the underlying demand-pull and wage-push dynamics, which had led to inflationary pressure prior to the pandemic, and so will take a while to dissipate. At the same time, the increase in costs due to bottlenecks in supply chains due to the pandemic have also contributed to this marginal fall in adjusted inflation.

Growth fell to 2.4% in the first quarter, as compared to 4.3% in the previous period. The trade deficit also widened, due to a sustained fall in exports, while the current account deficit also deteriorated amid falling foreign investment and capital flows. Suggestions are that the economy will contract severely in Q2, despite an improvement in these metrics in May, when containment measures were lifted.

The financial market has seen a continuous improvement due to the monetary policy decisions taken back in May. Money market rates have continued to fall, while yields on government bonds have also continued their decline, due to the high amount of liquidity pumped into the system by the central bank. The average lending rate to businesses has therefore shown a downward trend in Q2, while the deposit rate has not fallen by as much, creating a much wider spread than earlier. The foreign exchange rate with the Euro was stable throughout this period due to the upbeat sentiments surrounding the ECB’s recovery and stimulus plan.

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