The National Bank announced the seventh interest rate cut to 17% a year, that is 4.25 percent below the 21.25% wherefrom the downward trend started this June.
The central bank's Board decided to adjust the interest rate by 0.75 percentage points on December 16, six days after the national Statistics Institute had announced the twelve month inflation had gone down below the 10% threshold (9.9% November 2004 compared to November 2003) for the first time.
This and the prospect of this downward inflation trend continuing in December were the arguments that lent support to NBR's decision.
"The annual inflationary rate fell to 9.9% in November 2004, with the near future forecast pointing to the continuation of the decline in December. In order to validate this inflation deceleration process, the National Bank of Romania's Board of Governors decided to cut the interest rate by 0.75 percentage points to 17%," a press release of the central bank says.
"The market had seen the decision coming. The cut is a bit more aggressive than I had expected, but it is probably the outcome of the impact of the ROL's appreciation on the positive inflation trend. NBR is therefore betting on the inflationary trend reversal anticipated for the first quarter of 2005 not being a very important one," Radu Craciun, ABN Amro Romania chief analyst commented.
NBR is actually bringing up again the prospects of price increases expected for the first quarter next year, for which reason it reasserts its decision to maintain a cautious policy with regard to the frequency and extent of the interest cutting steps.
"Considering the aggregate demand will continue to rise at a steady pace and the relative price adjustments that will be operated as a result of the adjustments of the controlled prices in Q1, 2005, NBR's Board of Governors decided to maintain the prudent conduct of the monetary policy required for attaining the inflationary goals, including the longer term ones," the NBR release adds.
At the moment, maintaining a downward trend of the interest rate is no longer considered, but the speed this process can proceed at is. Beyond the confirmation of the inflation decline, the interest decrease is required by the upcoming opening of the ROL bank deposits to non-residents.
"NBR is preparing the interest cut steps depending on the moment it contemplates for the deregulation of the ROL deposits for non-residents. I do not know whether this has been decided or not, though I believe the announcement will come as a surprise intended to somewhat temper the enthusiasm of the foreign money," says Ionut Popescu, one of the authors of the PNL-PD Alliance (whose spokesman he is) economic programme.
Radu Craciun says NBR's announcement confirms the fact that the main concern is to narrow the interest spread, even if that means resorting to a riskier monetary policy, in order to prevent a shock at the time when the ROL deposits for non-residents become deregulated.
"I don't think the central bank can proceed at a 0.75 percent cut pace, especially if the year on year inflation goes up, so that the interest could reach 14.5-15% by April-May 2005," Radu Craciun believes.
razvan.voican@zf.ro
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