The central bank to keep benchmark rate at 6.25%, to slash minimum reserves in foreign currency

The analysts of ING Bank Romania estimate BNR will maintain the key rate following uncertainties on inflation after the VAT increase and floods. However, the ING economists deem the central lender could reduce the minimum mandatory reserves for foreign currency passives from 25 to 20 percent.

The chief-economist of Banca Comerciala Romana (BCR), Lucian Anghel, also expects BNR to hold the key interest rate at the current level. He mentioned the only way to relax the monetary policy is by reducing the minimum mandatory reserves, most probably in foreign currency. The analyst deems the cut could be of up to 5 percentage points, but that this decision could also be completed in the next meeting.

Ionut Dumitru, the chief-economist of Raiffeisen Bank Romania, expects BNR to opt for maintaining the benchmark rate and sees a reduction of the minimum mandatory reserves in foreign currency by 5 percentage points very probable.

Also, the members of the Association of the Financial-Banking Analysts in Romania (AAFBR) deem BNR could decide on holding the key rate at 6.25 percent, according to a release issued by the association.

As to the level of the minimum mandatory reserves, the AAFBR analysts believe BNR will keep those for lei passives at 15 percent, but two thirds of them estimate the reserves in foreign currency will be slashed at 20 percent.

BNR could miss the inflation target again

The chief-economist of UniCredit Tiriac Bank, Rozalia Pal, also deems the minimum mandatory reserves in foreign currency will be cut by 3-5 percentage points.

She believes the inflation will jump significantly because of the VAT increase starting July. “The inflation rate cannot meet target in 2010 and will reach the maximum value in August, above 8 percent annually,” said Pal, adding the bank foresees a 7.7 percent inflation for the end of 2010. The official also mentioned the inflation could recover in mid-2011 and lower to 4 percent annually.

BNR slashed the benchmark rate by 0.5 percentage points three times this year, from 8.5 to 6 percent, and by 0.25 percentage points once, to the current level of 6.25 percent.

The central bank settled an inflation target of 3.5 percent for the end of 2010, take or leave one percentage point (2.5-4.5 percent), the inflation prognosis being of 3.7 percent. In 2009, BNR missed the inflation target for the third time in a row.