Yesterday the National Bank of Romania chose to wait instead of acting. The pressure, mainly from the banking sector, was on NBR to cut rates. Amid global slowdown, at prima facie, the decision taken yesterday seems to be the wrong one. In the same time I believe that a cut of only 0.25% would have been pointless. Moreover, in a country with a history of high inflation the decisions to cut rates too early in the dis-inflationary process could have wreaked havoc for inflationary expectations . What monetary policy needs in Romania is a bold move if it wants to have a real effect. Of course always keeping in mind their current mandate of bringing inflation at the communicated targets.
In my view there are three reasons for NBR not doing anything right now:
1) A small decrease in key policy rate does not have any impact on the lending market or the real economy
2) It is waiting to get confirmation of global recession
3) It is waiting to get confirmation that the recent inflation developments are sustainable
Below is the entire statement from NBR. Highlights and italics are my own.
Press Release of the Board of the National Bank of Romania
In its meeting of September 29, 2011, the Board of the National Bank of Romania decided the following:
- to keep unchanged the monetary policy rate at 6.25 percent per annum;
- to ensure adequate management of liquidity in the banking system;
- to maintain the existing levels of minimum reserve requirement ratios on both leu-denominated and foreign currency-denominated liabilities of credit institutions.
The NBR will further monitor domestic and global economic developments so as, by accordingly adjusting its available instruments, to ensure the fulfillment of its objectives of achieving and maintaining price stability in the medium term as well as financial stability.
The analysis of developments in macroeconomic indicators shows a faster disinflation, in line with the central bank’s expectations. The annual inflation rate slid for the third consecutive month to reach 4.25 percent in August versus 7.93 percent in June, amid a steep reduction in volatile food prices and the gradual fading-out of the first-round effect of the VAT hike in July 2010. Moreover, the annual adjusted CORE21 inflation fell to 2.92 percent in August against 4.74 percent in June.
It is clear that looking back inflation is falling towards target, as per previous paragraph. But in the next we see that NBR is still concerned about inflationary pressures in the months ahead. Also, note that NBR still refers to moderate exchange rate volatililty contributing to tighter monetary conditions. Translation: do not expect sharp depreciation of the RON against major currencies.
Disinflation is expected to continue in the period ahead, so that annual inflation rate will near the target. The faster disinflation while keeping the monetary policy rate unchanged and amid a moderate leu exchange rate volatility translates into a tightening of real broad monetary conditions aimed at supporting the convergence of inflation towards the medium-term objectives.
The resumption of economic growth continued, albeit at a slower pace, amid a worsening of global risk appetite and of the outlook for growth worldwide, as well as amid increased uncertainties regarding the eurozone sovereign debt crisis. The dynamics of industrial output and exports moderated, while the revival of loans to the private sector, especially leu-denominated lending, remained sluggish. The slower pace of the Romanian economy is expected to be temporarily countered by the good agricultural output in the second half of this year.
In the next paragraph we see NBR’s attempt to introduce some predictability to the monetary policy. I guess some can read this as proof that NBR will cut key policy rate at the next meeting on November 2nd. But I would not be so sure. The main macro variables will still show some growth in the economy but they are mostly backward looking. To lower rates NBR will have to take a decision based on a forecast which will show an economy on the edge of recession. In Romania today I am not sure that such forecast will be made public. Thus, unless NBR does a major shift in the way it takes decisions I do not expect a cut on November 2nd. The best we can hope for is cut in MRR for RON and maybe a decrease of the interval around the key policy rate (+4% Lombard rate and -4% O/N deposit with and NBR). For a cut to have any effect it needs to be at least 100 bps.
The prospects reveal a consolidation of disinflation, but also persistent uncertainties related to developments in the external environment, capital flows, as well as administered and some volatile prices. Therefore, the central bank will gradually adjust the monetary policy stance, in line with these developments and in the context of fulfilling the Romanian authorities’ commitments under the external financing arrangements with international institutions.
Ensuring price stability, together with maintaining financial stability, paves the way for a sustainable cut in the costs of leu-denominated loans, a process fostered by the NBR. The resumption of lasting economic growth should also consider a boost of leu-denominated saving, which would secure sustainability of the external deficit and gradually reduce reliance on external financing.
In this context, the NBR Board decided to keep the monetary policy rate at 6.25 percent per annum, to further pursue an adequate management of liquidity in the banking system and maintain unchanged the minimum reserve requirements for both leu and foreign currency-denominated liabilities of credit institutions.
The NBR will further monitor domestic and global economic developments so as, by accordingly adjusting its available instruments, to ensure the fulfilment of its objectives of achieving and maintaining price stability in the medium term as well as financial stability in the context of fulfilment of commitments under the external financing agreements with the European Union, the International Monetary Fund and other international institutions.
In line with the announced calendar, the next NBR Board meeting dedicated to monetary policy is scheduled for November 2, 2011, when the new quarterly Inflation Report is to be examined.