Romania’s National Bank BNR decided to cut the monetary policy interest rate by 0.25 percentage points to a new historic low of 1.75%, starting May 7, 2015. The decision surprised most analysts who didn’t expect another rate cut.

The central bank also decided to cut the minimum reserve requirements ratio on RON-denominated liabilities of credit institutions to 8% from 10%, aiming to further boost lending in local currency.

BNR made the previous interest rate cut at the end of March 2015. The central bank started the monetary easing in July 2013, when it slashed the monetary policy rate from 5.25% to 5% and then continued it with gradual cuts accompanied by the reduction of minimum reserve requirements ratio on local banks’ liabilities, to encourage lending.

Most analysts were expecting BCR to take a break from interest rate cuts. “In our base scenario we were anticipating the central bank to keep the monetary policy rate at 2%,” said Banca Transilvania’s analysts in a note to investors.

They think that the BNR board were encouraged to this new cut by the perspective that the inflation rate will stay under the lower level of the targeted interval (1.5%) in the next period, due to the VAT rate cut for food from 24% to 9% starting June 1.

“Although BNR was less sensitive to fiscal changes it seems that this time the central bank took advantage of the low internal inflation and the monetary easing in the Eurozone to consolidate the financing costs convergence between RON versus euro,” the analysts said.

They expect the new decisions to lead to lower financing costs in local currency for companies and individuals and to lead to an increase in lending.

The total loans in local currency have increased by 7.5% over the past 12 months, while the loans in foreign currencies dropped by 10.8% in the same period. Overall, the total loans in local banks’ balance sheets declined by 3.4% from March 2014 until March 2015, to some EUR 38 billion.

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Andrei Chirileasa, andrei@romania-insider.com