Surprising cut in the key rate

In our opinion, the significant drop in inflation rate along with the need to support RON consumer lending at the expense of FX lending in the context of the recent changes in retail lending regulations stood behind this unexpected move.

The press release issued by the NBR mentions a modest revival of non-government loans due to a pro-cyclical behavior of banks, which reflects risks and uncertainties related to the sovereign debt crisis in euro zone and mixed signals on world economy recovery. The inflation rate will stay within the targeted area in 2011-12 according to the NBR, even if there are some medium-term risks related to the external environment, the fiscal policy stance and administered price adjustment.

We see today's decision as the beginning of a monetary policy easing cycle and forecast a key rate of 5.5% in March 2012. 5Y government yields will not necessarily follow this impressive path and are expected to fall by only 10-20 bp until next March.