Romania’s central bank warns about negative impact of budget policy uncertainty

26 November 2020

Romania's National Bank (BNR) board members agree that the uncertainty related to the budgetary policies put pressure on the sovereign risk premium and increase the exchange rate volatility, according to the minutes of the monetary board meeting on November 12.

The public finance outlook and the heightening, in the electoral context, of the associated uncertainties have led to additional pressure on the sovereign risk premium, with potential consequences on the exchange rate volatility and, implicitly, on inflation and ultimately on financing costs and the pace of economic recovery.

However, the recent fluctuations of the EUR/RON exchange rate – brought about by the heightened global risk aversion in the context of the new pandemic wave and by domestic political decisions posing risks to public finance sustainability – have been far more moderate than those in the region, the BNR board members reasoned.

They reiterated that preserving confidence in the domestic currency, in the context of widening twin deficits, was a key element of monetary policy conduct in 2020, implying a gradual and sustainable reduction in interest rates on the money market and local currency-denominated loans.

The BNR board members also believe that financial market conditions have continued to improve due to the three successive policy rate cuts carried out March through August and the liquidity provided by the central bank to credit institutions, which have allowed the adequate financing of the real economy and the public sector, amid the relative stability of the EUR/RON exchange rate.

Thus, the key interbank money market rates have stuck to a downtrend in the past months, albeit relatively slower and marked recently by some small fluctuations.

At the same time, yields on government securities remained on a downward course, with 10Y bonds hitting four-year lows.

(Photo: Lcva/ Dreamstime)

andrei@romania-insider.com

Normal

Romania’s central bank warns about negative impact of budget policy uncertainty

26 November 2020

Romania's National Bank (BNR) board members agree that the uncertainty related to the budgetary policies put pressure on the sovereign risk premium and increase the exchange rate volatility, according to the minutes of the monetary board meeting on November 12.

The public finance outlook and the heightening, in the electoral context, of the associated uncertainties have led to additional pressure on the sovereign risk premium, with potential consequences on the exchange rate volatility and, implicitly, on inflation and ultimately on financing costs and the pace of economic recovery.

However, the recent fluctuations of the EUR/RON exchange rate – brought about by the heightened global risk aversion in the context of the new pandemic wave and by domestic political decisions posing risks to public finance sustainability – have been far more moderate than those in the region, the BNR board members reasoned.

They reiterated that preserving confidence in the domestic currency, in the context of widening twin deficits, was a key element of monetary policy conduct in 2020, implying a gradual and sustainable reduction in interest rates on the money market and local currency-denominated loans.

The BNR board members also believe that financial market conditions have continued to improve due to the three successive policy rate cuts carried out March through August and the liquidity provided by the central bank to credit institutions, which have allowed the adequate financing of the real economy and the public sector, amid the relative stability of the EUR/RON exchange rate.

Thus, the key interbank money market rates have stuck to a downtrend in the past months, albeit relatively slower and marked recently by some small fluctuations.

At the same time, yields on government securities remained on a downward course, with 10Y bonds hitting four-year lows.

(Photo: Lcva/ Dreamstime)

andrei@romania-insider.com

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