Romania's central bank delivers quarter-point rate cut to 1.25pc

BUCHAREST: Romania's central bank unexpectedly cut its benchmark interest rate by a quarter-point to 1.25% on Friday, lending a hand to an economy battered by the new coronavirus pandemic.

The bank delivered three rate cuts worth 1 percentage point overall last year, as well as cuts to minimum reserve requirements on commercial banks' hard currency liabilities and pledges to provide market liquidity as needed.

Policymakers have said maintaining confidence in Romania's currency, the leu, underpinned monetary policy in 2020 given widening budget and current account deficits and two rounds of elections.

Since then, a new centre-right government has been sworn in, easing some of the political instability that had weighed on Romanian assets. A majority of analysts polled by Reuters had expected the bank to hold fire at its first meeting this year, although they expected cuts later on.

The surprise rate cut will be enforced from Jan. 18, when its lending (Lombard) and deposit facilities will also fall by a quarter point to 1.75% and 0.75%, respectively.

Romania has reported 688,270 coronavirus infections and 17,098 deaths since late February.

Even before the pandemic, Romania was struggling with a widening budget deficit, eroded by years of political instability and fiscal largesse. Ratings agencies have Romania on their lowest investment grade, with negative outlooks.

Inflation eased to 2.1% in December, in line with the central bank's forecast. The bank currently expects inflation to reach 2.5% this year, less than the 2.9% estimated by a poll of analysts.

Today's decision "does come in the vein of recent developments in the money market where the liquidity appears to have improved significantly," ING Romania chief economist Valentin Tataru said.

"The timing of the decision (Friday, after the end of the trading session) suggests that the central bank is vigilant and preoccupied by the market reaction to additional easing."

The Romanian leu EURRON= was down 0.1% against the euro.