Romania's central bank cut its policy rate by a further 25 basis points to 4.25 percent, as expected, saying a resumption of disinflation has allowed the central bank to continue easing its policy.
It is the third rate cut in a row by the National Bank of Romania (NBR), which has cut rates by a 100 basis points this year following last year's cuts totaling 75 basis points.
Romania's inflation rate fell to 3.67 percent in August from 4.41 percent in July due to lower food prices and the effect of the negative output gap, the NBR said.
"This trend, in line with the central bank's forecast in the latest inflation report, strengthens the favourable outlook for the annual inflation rate to fall below the 2.5 percent target in the forthcoming period," the central bank said, adding it expects disinflation to continue until the first half of 2014.
Last month the central bank lowered its inflation forecast for this year to 3.1 percent from 3.2 percent and economists expect the NBR to continue to cut rates further this year.
The pass-through of the central bank's rate cuts to lending rates to companies and households is still moderate and taking place with a certain lag, but the ongoing adjustment of monetary conditions is aimed at preserving medium-term price stability while also paving the way for the sustainable recovery of lending to the private sector and thus restore confidence and lasting economic growth, the NBR said.
Economic activity in Romania has been mixed, with exports as the main driver having a positive impact on manufacturing output and the current account, offsetting the unfavourable impact of the slow recovery of consumption and investment on growth.
Romania's Gross Domestic Product expanded by 0.5 percent in the second quarter from the first, for annual growth of 1.5 percent, down from 2.1 percent in the first.
The NBR said annual growth in loans to the private sector remain in negative territory but credit institutions have "considerable room for manoeuvre in cutting interest rates on lending to the real sector, subject to prudential rules."
A balanced monetary policy stance and the new precautionary funding arrangement concluded with the International Monetary Fund will contribute to stabilize Romania's economy and strengthen its resilience to external shocks, the bank added.
On Friday the IMF's board approved a two-year $2.7 billion stand-by arrangement for Romania. Under the deal, Romania does not plan to draw on the funds but retain them as a buffer to reassure investors. Romania has committed itself to undertake structural reforms, including an update to its health system and sell state assets in the energy sector.
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