ING expects NBR to cut rate by 75 basis points

The National Bank of Romania is likely to cut benchmark interest rate by three quarters of a percentage point to 6.75%, given IMF’s decision to free up the funds under the rescue package, and the visible improvement of the country’s economy, ING said in a report.

“We were expecting a 50 basis points of rate cut, but now we think the central bank could slash the main rate by 75 basis points in a surprise move to the markets. As for reserve requirements, the policymakers are likely to leave statutory ratios unchanged, both for leu and forex-denominated liabilities”, ING said.

The majority of economists polled by Wall-Street and Bloomberg forecast a mere 50 basis points of rate cut, from current 7.5% to 7%.

ING analysts say “the central bank may be more aggressive in its monetary policy moves, for various reasons”, the most important being that a rate cut is necessary in the current economic situation. “The board of NBR is likely to lower interest rates, as benefits outweigh the risks”, the bank said.

A 0.75 percentage point cut would be grasped by investors as a signal that the Romanian economy is on the right track and at the same time it would provide the necessary incentives to strengthen the country’s economy.

“In light of the high market interests, a 0.75% rate cut would be necessary to lower them. A mere 50bp cut would only keep interests unchanged or even lift them”.

The unlocking of the two tranches in crisis assistance from the International Monetary Fund and European Commission is likely to tone up the local currency. “Therefore, the bank may try to make the leu less attractive by slashing key rate in a surprise move to the market”.

A surprising decision of the central bank would add some steam to the national currency against its European peer on a short-term, “we don’t rule out a possible short-term correction”, ING stressed.

The policymaking group of the National Bank of Romania will gather in the second rate-setting session of the year. In the early-January session, the bank slashed the main rate from 8% to 7.5%.

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