•In line with both our anticipations and market expectations, the National Bank of Romania cut the monetary policy rate by a further 25bps to 3.75%. The NBR also decided to cut minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions from 15% to 12% and from 20% to 18%, respectively.

•We consider that the NBR will continue easing, cutting the key rate again by 25bps to 3.50%, at its next meeting on 4th February. We also anticipate that reducing the minimum reserve requirements ratios will continue this year. The central bank could also implement other measures, including changing the corridor around the monetary policy rate for interest rates on the central bank’s standing facilities to credit institutions (currently at +/- 3 percentage points) by cutting it further and/or making it asymmetrical.

•In December consumer prices increased by 0.33% compared to November and by 1.55% compared to a year ago. The 2013 average inflation rate was 4.0%yoy, with the average core2 inflation at 1.9%yoy.

•We anticipate that throughout 2014 the annual inflation rate will remain below the upper limit (3.5%) of the central bank’s targeted band (+/- 1 percentage point around the central bank target of 2.5%). Moreover, we expect that inflation will decelerate significantly in the first quarter, falling below the threshold of 1.5%, thus temporarily exiting the central bank's target range, and afterwards to gradually increase towards the end of the year to 3.3-3.4%.

•The export figures indicate that the firm demand for Romanian products continued in November and although the annual growth rate of exports slightly decelerated compared to the significant rate reached in October. 

•The central bank monetary policy decisions supported the fall in money market interest rates and treasury securities yields. 

•The Ministry of Public Finance has organised three auctions since the beginning of the month, raising a total amount of RON 2.4bn, higher than the amount planned of RON 1.7bn through a six-month T-bill and two T-bonds maturing in 2016 and 2021, at lower yields compared to previous auctions held for the respective tenors. 

•According to sources cited by Bloomberg, Romania plans to issue on the external market two USD-denominated T-bonds maturing in 2024 and 2044, the initial price being 237.5bps and 270bps over the mid-swap.

•In line with other currencies in the region, the RON lost ground against the single currency at the beginning of the year, with EUR/RON increasing from around 4.4630 to a high of 4.5490 (the highest level of the last six months).

•The beginning of the year saw a lower EUR/USD compared to the end of 2013, gradually falling from around 1.3770 to the 1.3650-1.3600 area. Since the beginning of the year investors have focused on releases of economic data, especially in the US, hoping to anticipate the Fed’s next monetary policy decisions.

Florentina Cozmâncă, Senior Economist
The Royal Bank of Scotland plc, Edinburgh, Romania Branch