The NBR cut the key rate by 50 bp to 7.5% - Raiffeisen analysis

In November 2009, the NBR remained on hold after it had cut the monetary policy rate five times in a row by a cumulative 225 bp. Then, the NBR's decision was justified by the increase in the uncertainties regarding future developments in the economy (including here the financial agreement with the IMF and the European Commission) due to the political turmoil. We think that today's decision was possible because the political situation re-entered normality and the agreements with the IMF and European Commission have large chances to remain on track. We recall that a new government was established at the end of December 2009, the budget plan for 2010 is expected to be approved by the Parliament by mid-January, and a new IMF mission is expected to arrive in Bucharest at the end of January (with prospects to release the third and the fourth installments in February).

Moreover, both the development of economic activity and the inflation argue for lower levels of the interest rates. Consumption and investments plunged in 2009, while the real interest rates in the economy are the highest among the EU member countries. Although in January the monthly inflation rate would be high due to adjustments in excises for cigarettes and fuels, the disinflation perspectives are quite good in the following months (we expect inflation to go down bellow 4% until June 2010). Probably the NBR's decision is also intended to speed up the downward trend for lending interest rates.

We expect the NBR's decision to have no negative impact on the exchange rate, as the risk perception for the leu improved in the last weeks.

Most likely, NBR would continue to cut further the monetary policy rate by the end of this year and to ease also the minimum reserve requirements.