Garanti Bank estimates a step-by-step cut of the monetary policy rate, according to the Quarterly Macroeconomic ReportPublish date: 20-06-2013
A softening monetary policy might play an important role in stimulating both domestic consumption and investments through the re-launch of lending activity, Garanti Bank, one of the most dynamic and innovative banks in the local market, estimates in its Quarterly Macroeconomic Report corresponding to the second quarter of this year.
The Bank estimates a progressive cut of the key rate, of 0.75 percentage points this year, down to 4.5%, and of 0.5 percentage points at the beginning of 2014, down to 4%. However, in case of stronger depreciation pressures on RON, just as seen at the beginning of June, the NBR could hold temporary the yields in an attempt to defend the currency.
"The current market conditions, with lending activity still contracting, call for cheaper financing. Given the improved inflation expectations, NBR is able to give a helping hand for the struggling domestic demand through a softer monetary stance”, says Rozalia Pal, Chief Economist with Garanti Bank.
A more relaxed monetary policy is one of the few factors that could boost internal consumption. Moreover, the better agricultural production is expected to contribute positively to the expected 1.7% GDP growth in 2013. Other factors that could stimulate the economy are the privatisation of state-owned companies, as agreed with the International Monetary Fund, a betterEU funds absorbtion rate and the relaunch of infrastructure projects.
According to the quoted Macroeconomic Report, Garanti Bank also estimates the EUR/RON to stabilize at around 4.35 by year-end and 4.25 for 2014, under the assumption that the political environment stays stable. 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.
Furthermore, Romania's vulnerability facing global and regional movements could be mitigated by increasing the credibility of structural reforms by concluding a new stand-by agreement with the IMF. The country's attractiveness will improve once the results of structural reforms will be reflected also in accelerated economic activity.
The real GDP in Q1 came above expectations with 0.7% quarterly and 2.2% yearly expansion, respectively.
Garanti Bank's Report notes that the Q1 growth was entirely driven by external demand. Regarding domestic demand, consumption was depressed by the negative real private wage growth, while investments were affected by the still blocked European funds. Still, Garanti Bank expects that consumer appetite might receive some boost from cheaper financing in local currency and the possible RON appreciation in the second part of the year.
Also, inflation expectations improved. Garanti Bank estimates a 3.5% inflation rate by the end of 2013, thus entering the NBR target band. On one hand, a drop in food prices is expected, following the better harvest this year, on the other hand pressures on energy prices will persist, with a projected 13.6% increase in December 2013 as compared to last year.
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