IMF-led financial assistance package is supportive of easier monetary policy “as it mitigates risks on the external financing and currency fronts, while including measures to tighten the fiscal policy”, Citi analysts said.
This, coupled with the ongoing contraction of economic activity, opens the road to further rate cuts. The only thorn in the side of further easing is the inflation rate, which is providing stickier than expected.
“We have revised our year-end inflation forecast to 5.5% from 5.0% in view of the higher-than-expected inflation readings in the first quarter, which were largely driven by leu weakness”, Citigroup said.
In contrast, NBR has revised its inflation target range downward for the end of this year, from 4.5% to 4.4%, according to an earlier statement of the governor of central bank occasioned by the publication of quarterly report on inflation.
The annual inflation rate marked annual growths of 6.71%, 6.89% and 6.71% in first quarter while National Prognosis Commission takes into account an average of 5.8% projection and 4.5% for yearend.
“Compared with the 2.5-4.5% target range for end-2009, current inflation dynamics suggest that the Bank will probably maintain a prudent stance and postpone the bulk of the easing to the second half of the year. We expect the NBR to bring its policy rate to 8.75% by year-end”, Citigroup said.
NBR has cut the benchmark rate from 10 to an annual 9.5%, topping analysts’ expectations, who said the regulator would cut rate by 0.25% at the most. NBR’s decision came on the heels of the IMF board approval of stand-by program and the release of first installment of 4.9 bln euros on May 6.
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