NBR may cut benchmark rate to 9%, analysts say

National Bank of Romania may cut the benchmark lending rate by 0.5% to 9 percent on June 30, following higher-than-expected economic contraction, according to market analysts who also don’t exclude a possible reduction of reserve requirements for leu-currency liabilities, in an effort to secure a permanent cash flow in the market.

Analysts stress that Romanian economy has weakened above expectations in first quarter, and under these circumstances, the current benchmark rate is too high.

Romania’s Gross Domestic Product dropped in first quarter by 6.4% YoY, according to National Institute of Statistics.

“The economic activity weakened in first quarter more than analysts and central bank had expected. Therefore, NBR may consider the reduction of the lending rate”, said Nicolae Alexandru Chidesciuc, senior economist at ING Bank Romania.

He expects the regulator to cut the rate to 9% from 9.5%, but doesn’t exclude the reduction to go beyond 75%.

Moreover, Chidesciuc says National Bank of Romania could cut the reserve requirements for leu liabilities of banks, from 18% in order to secure a permanent cash flow in the market.

“There is indeed sufficient liquidity in the market resulted from the central bank’s recent operations, and the reduction of RRR will trigger a stronger impact. Nevertheless, it is too early to estimate a decision in this matter, because NBR prefers to adopt a prudent approach”, said Chidesciuc.

These measures will not push the local currency further down, as investors’ sentiment toward the region has improved significantly, ING’s analyst continued.

But pursuing a RRR-cutting measure for leu liabilities would be a prudent move, as most analysts consider, after the previous reduction of reserve requirements ratio from 20% to 18%.

“The central bank has already made a commitment regarding the reserve requirement ratio, and for Fx reserve it has already modified them. Furthermore, NBR prefers to take a cautious approach in an effort to preserve its Fx reserves in the event of a sharp devaluation of the local currency”, according to Raiffeisen Bank’s senior economist Ionut Dumitru who sees a reduction of RRR for leu liabilities to 16%.

Some analysts don’t exclude a possible change in RRR in foreign currency with residual maturity below 2 years, which currently stands at 40%, the highest level in European Union.

Source: Wall Street