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Press statement from Mugur Isarescu, the BNR Governor

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Over the past four weeks, the National Bank of Romania (BNR) has further implemented the measures decided by the NBR Board on 20 March 2020 and reconfirmed as line of action in the Board meeting of 29 May 2020.

Providing the necessary liquidity for the financing of real economy and government expenditures has remained the topmost priority. Thus, given a liquidity shortfall on the money market, the NBR conducted new bilateral repo operations (as set forth in Article 9 of Regulation No.1/2000 on open market operations performed by the NBR and standing facilities granted to eligible participants), the daily average stock of these operations standing at around lei 7 billion in the period from 15 May to 15 June. Moreover, the NBR continued to purchase leu-denominated government securities on the secondary market, the total volume of which exceeded lei 3.8 billion on 5 June 2020. Pursuant to the provisions of Article 7(c) of the aforementioned Regulation, outright transactions in government securities may only be carried out on bilateral bases. The NBR’s option for bilateral operations relates to the concern for providing liquidity in strict connection with financing needs and for sustainably lowering interest rates, while preventing excessive volatility of the leu’s exchange rate and the unnecessary depreciation of the domestic currency.

This approach enabled the smooth financing of government expenditures and of the real economy along with the gradual reduction in interest rates and the relative stabilisation of the leu’s exchange rate, realities that have become obvious in recent weeks. Hence, the period from 15 May to 15 June saw eight government security issues by the Ministry of Public Finance, totalling around lei 8.3 billion, all of which were markedly oversubscribed, indicating that budget needs were adequately financed. Money market rates saw their decline consolidate, the effect being cheaper credit for households and companies/firms (the 3M ROBOR rate, which is the benchmark rate for bank loans, dropped from 2.44 percent on 18 May to 2.15 percent on 16 June), while reference rates on the secondary market for government securities remained on the downward path that had steepened at the beginning of April. Maturities of up to 1 year declined slightly even below the values recorded prior to the outbreak of the global financial market turmoil, while the 10-year rates returned to the readings seen in the first half of March.

The still higher interest rates in Romania, as compared to those applicable in Czechia, Poland and Hungary, are the consequence and not the cause of Romania’s economic and financial situation: twin deficits, the widest fiscal deficit in the EU at the beginning of the pandemic-generated economic crisis and the high financing requirement for fiscal deficit coverage and public debt refinancing. Such prevailing realities put continued upward pressure on interest rates on Romania’s borrowings. The ratings of credit agencies, the public assessments of the European Commission and the European Central Bank also contribute to this distinction and cannot be disregarded.

For the period ahead, our actions remain within the limits of this monetary policy stance. The main risks we anticipate for Romania’s economy and finance are clearly related to public health developments. Therefore, we will continue to monitor and update our assessments and steer measures towards providing the necessary liquidity, while safeguarding financial stability and maintaining a sustainable trend of gradual decline in interest rates. The measures will be carefully calibrated so as not to deter domestic saving, which is the main financing source of real economy and the budgetary sector. The monetary and financial risks would be amplified if we failed to consider these permanently changing conditions. It is also for precautionary purposes that the ECB and the NBR agreed on setting up a repo line to provide euro liquidity to the NBR. This measure is intended to address potential urgent euro liquidity needs following possible market dysfunctions, which might emerge if the regional and international impact of the COVID-19 pandemic intensified significantly.

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