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In line with the market consensus and our call, the NBR delivered a 25bp cut to 4.25% (the cumulated cuts now total 100bp). However, we incorrectly expected the cut would be matched with a slight easing of reserve requirements, as we were looking for another bold move after the surprising 50bp cut delivered previously (5 August).
The main takeaway of this meeting is that the easing cycle is to continue. The NBR Board calls the easing cycle "on going" in the press release and the governor painted the relatively faster drop in deposit rates vs the ones of loans as an important issue, but one that will not deter the Bank from further easing. This is favourable as we believe another 50bp of cuts are in the pipeline (we expect 25bp cuts in the November and January meetings).
The relative dynamics of rates for loans/deposits was also cited as the main reason why the Bank did not cut by 50bp at yesterday's meeting. We are fairly puzzled about this argument, failing to grasp the general concept that a producer can influence the margins charged by its distributors through small adjustments of the price level of its manufactured goods.The unusually short question & answer session (about 7 minutes vs around a 30 minute average in the previous meetings of this year) focused on the relative dynamics of rates, but we fail to see why this aspect is grabbing the limelight. The only aggregated data that comes from the NBR and is available with quite a lag. The latest data covers July and, like the June figures, lending rates are on a firming trend. Interestingly, the increases are smaller than the one of the main money market benchmark, ROBOR 3M, (possibly influenced by hints from the Fed), which suggests that banks' margins are shrinking. This is true for corporate loans but also mortgage and consumer loans.
A look at deposit rates yields a similar conclusion.
The RON money market has been under pressure during the summer due to tapering concerns but these have more than reversed in August and September. Assuming banks kept a fairly steady interest rate margin during the past couple of months, NBR data will soon show an impressive drop in lending rates like the key rate and ROBOR 3M, lending rates have probably set (nominal) record lows.
This should be quite clear soon. Today sees the release of the August rates and by the next meeting (5 November) the NBR should also see the record lows likely reached last month. Following this logic we should be concerned that the easing cycle may be nearing its end faster than we forecast, but for the moment we believe much of such potential concerns stemming from mixed signals may be the product of odd communication (similar to May, when the NBR effectively tightened policy by hiking the important deposit rate while announcing it will soon start an easing cycle).
Awaiting more information we still expect another 50bp of cumulated cuts and a return to the previous view that the NBR may opt to operate an easing of reserve requirements towards the end of its rate cutting cycle given that the former is more difficult to reverse than a rate cut and given the apparent strong preference of the Bank for gradual adjustments.
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