NBR cuts the key rate for the third time in a row

We think that the continuation of the fiscal consolidation program agreed with the IMF and EU was a key driver of today's decision. President Basescu recently said that politicians should reconsider the decision regarding a small increase in public wages and pensions in 2012. The decline of the inflation rate to a record low of 2-2.5% in 2Q12 was another reason behind the NBR decision to continue the easing cycle. The recent Eurobond issue of USD 1.5bn will boost the FX reserves to almost EUR 34bn and will provide the NBR with enough ammunition for interventions in favor of the RON. The deterioration of the economic growth prospects for 2012 was probably a less important issue. A structural shift of nongovernment lending from FX loans to RON loans will take several quarters, so we do not expect a significant revival of lending in 2012.

We do not rule out a continuation of the easing cycle in the next months. However, a new cut in the key rate increases the likelihood of a reversal of the easing cycle in 2H12 as inflation could rise again.

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