March 20, 2020 / 4:30 PM / 19 days ago

UPDATE 1-Romania's central bank delivers surprise rate cut, loosens policy

(Adds bank comment, analyst, details)

BUCHAREST, March 20 (Reuters) - Romania’s central bank cut its benchmark interest rate by 50 basis points to 2.0% in a surprise meeting on Friday and narrowed the corridor between its lending and deposit facilities, it said in a statement.

The unexpected rate cut, which the bank said was aimed at curbing the economic fallout from the coronavirus outbreak, will be enforced from March 23.

The bank also cut its lending rate facility to 2.50% from 3.50%, while holding its deposit rate at 1.50%.

It will provide liquidity to banks via repo transactions and purchase leu-denominated debt on the secondary market to consolidate structural liquidity in the banking system, which analysts said amounted to quantitative easing.

Liquidity injections coupled with the narrowing corridor will ensure interbank rates stay close to the benchmark rate, boosting the effectiveness of the cut.

“Depending on how the situation evolves, the central bank board stands ready to also proceed to cutting the minimum reserve requirement ratios on leu- and foreign currency-denominated liabilities of credit institutions,” the bank said.

“In view of the elevated uncertainty surrounding economic and financial developments, the board also decided to suspend the previously announced calendar of monetary policy meetings and hold monetary policy meetings whenever necessary.”

The European Union state, which has recorded 308 coronavirus infections but no deaths, declared a state of emergency on Monday. The centrist minority government approved a set of measures amounting to 2% of GDP, including granting unemployment aid and guaranteed lines of credit.

After keeping rates unchanged since May 2018, the central bank’s move follows similar actions by many of its peers around the world which have cut rates and begun liquidity injections to stave off the economic impact from the virus outbreak.

“These are unprecedented measures, and they show how determined the central bank is,” said Ionut Dumitru, chief economist at Raiffeisen Bank Romania.

“They will have a major impact and will show immediate results, especially the liquidity injections.”

Romania’s finance ministry has failed to sell debt at its last four consecutive tenders.

The Romanian leu traded at 4.8520 per euro at 1610 GMT, unchanged in the day. (Reporting by Luiza Ilie; Editing by Kirsten Donovan)

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