Garanti Bank Sees Romania Central Bank Easing Key Rate By 75 Bps In 2013

Garanti Bank estimates Romania”s central bank will likely reduce its key interest rate by 75 basis points this year amid improved inflationary expectations.

In its latest quarterly macroeconomic report, the local unit of Turkey”s second largest bank Garanti Bankasi A.S. forecasts the year-end rate may ease to 4.5% from 5.25% presently, followed by another half-point cut in the first quarter of 2014.

„The current market conditions, with lending activity still contracting, call for cheaper financing. Given the improved inflation expectations, the central bank is able to give a helping hand for the struggling domestic demand through a softer monetary stance”, said Rozalia Pal, chief economist at Garanti Bank.

However, a weaker leu could prompt the central bank to leave its key rate on hold to defend the currency, Garanti Bank said.

The bank estimates the leu/euro pair will trade near 4.35 by the end of 2013, provided the political environment remains stable.

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„Currency evolution will strongly depend on the foreign investors” appetite for Romanian bonds, as well as for state-owned enterprises to be privatized and, consequently, on the privatizations success,” the report noted.

Romania”s central bank last month lefts its key rate unchanged at 5.25% for the ninth consecutive meeting, but indicated it may resume a monetary easing cycle at its following meeting in July, reflecting lower inflationary pressure.

The central bank forecasts an annual inflation rate of 3.2% in December 2013, one notch below the upper end of its 1.5%-3.5% target range.