Romania’s central bank lent banks RON16.6bn (€3.6bn) at 2.5% p.a. in a one-week repo-type auction on October 29, to calm down the money market interest rates that hit new records on October 26-29 (with the overnight rates at 3.36%/3.66%). 

This was the largest volume of money injected by Romania’s central bank by repo-type operations in the past five years.

The interest rates have increased on Romania’s money market over the past two weeks. The last repo-type operation took place four weeks earlier, on October 1 (RON9.7bn). The central bank resumed injecting money on the market last October after a two-year halt, as the money market tightened and the interest rates rose. It suspended the deals during H1 but had to start bringing money into the market again during H2.

Bank analysts attribute the lack of liquidity in the market to seasonal factors mainly related to the fiscal execution (higher budget deficit run by the government in the last months of the year). On the other hand, the central bank is deferring interest rate hikes and is toning down excessive interest rates on the money market (hence wide spreads versus the 2.5% monetary policy interest rate) by such liquidity injections. The 3.5% threshold is seen by the central bank as a target for the 12-month interest rates on the money market, but it has been exceeded since mid-October.

Further pressures are expected toward the end of the year as the Treasury will run deeper deficits in November and December. The Treasury had to accept yields of 3.46% (on average) for its 12-month bills issued on October 30, up from 3.38% in September and 3.31% in August, despite the central bank’s injection of funds on the market. The Treasury had to accept a 5.15% average yield for its 10-year bond this month, up from 4.98% in September.