Romania’s annual inflation rate went down to a new historic low of 2.6 percent in February 2012, from 3.14 percent reported in December 2011, said Mugur Isarescu, the Governor of the Romanian Central Bank (BNR), during the press briefing held to give more details on the decision to further cut the key interest rate. “This came as a result of meeting the economic and financial program provided under agreements with EU, IMF and other international institutions,’ said the Governor, adding that the reevaluation of the inflation outlook again confirms its slowdown in the near future.

“Basic statistical effects will temporarily increase the annual inflation rate in the second half of 2012, but without exceeding the range of variation around the target of 3 percent,” said Mugur Isarescu.

From when the BNR's policy to cut the key interest rate began, the money markets has reacted quickly, through lowering the interbank interest rates below the level of the key interest rate. “However, tensions and uncertainties associated with sovereign debt crisis at the European level were also felt on Romanian banking market by limiting mutual exposure between credit institutions,” said Mugur Isarescu, adding that this had a negative impact on the distribution of liquidity in the banking system and money market.

BNR’s Board of Directors decided today ( March 29 ) to make another cut to the key interest rate, from 5.5 percent to 5.25 percent. Thus, starting March 30, 2012, the rate on deposit facility is lowered to 1.25 percent from 1.50 percent, and the interest rate on lending facility will be 9.25 percent per year, from 9.50 percent, according to Mugur Isarescu.

BNR says that achieving the prices and financial stability objectives, in the context of meeting the commitments made in the agreements with the EU, IMF and other international financial institutions, is essential for lasting economic growth. As a result, speedier absorption of European funds and gradual recovery in domestic demand will lead to the recovery of the Romanian economy, on a sustainable basis.

BNR reduced the key interest rate from 6.25 percent to 6 percent in November 2011. Romania was the first of the emerging EU countries to cut the key interest rate in May 2010, from 6.5 percent to 6.25 percent, in order to stimulate economic recovery. In December 2009, the key policy rate was of 8 percent and gradually decreased throughout 2010.

Irina Popescu, irina.popescu@romania-insider.com