In its meeting of 4 February 2014, the Board of the National Bank of Romania decided the following:
- To lower the monetary policy rate to 3.50 percent per annum from 3.75 percent starting with February 5, 2014;
- To pursue an adequate liquidity management in the banking system;
- To maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The NBR Board has examined and approved the quarterly Inflation Report, which will be released to the public in a press conference scheduled for 6 February 2014.
The latest macroeconomic data point to faster disinflation attributed to the influence of one-off factors (above-average crops in 2013, the cut in VAT rate for bread, flour and some bakery products, the base effects deriving from the weak harvest of 2012, and the increase in the electricity price in December 2012) and persistent factors (the negative output gap, inflation expectations).
Annual inflation rate dropped to 1.55 percent in December 2013 from 1.83 percent a month earlier. Furthermore, the average annual inflation rate declined to 4.0 percent in December 2013 against 4.3 percent in the previous month, and the average annual inflation rate measured by the harmonised index of consumer prices, a relevant indicator to ensure EU‑wide comparability and to assess the degree of convergence with the European Union, remained on a downward trend to stand at 3.2 percent in the final month of 2013, from 3.5 percent in November.
The significant improvement in the path of inflation and the related outlook has enabled the central bank to gradually adjust the monetary policy stance over the past few months, while effectively anchoring inflation expectations and closely monitoring domestic and external developments.
As for economic growth, in 2013, exports were the driving force behind the pick-up in economic activity in Romania, having a further favourable impact on the current account, whereas consumption and investment are envisaged to recover gradually. Lending to the private sector saw however negative annual dynamics in real terms, despite a slightly improving trend in lei-denominated loans.
The successive monetary policy rate cuts have favourably fed through, albeit with a certain lag, to lending rates across the real sector, thus confirming the consolidation of the transmission of the monetary policy signals. At the same time, the reduction in minimum reserve requirement ratios – to gradually bring them into line with European levels – is likely to provide incentives for sustainable bank lending to the Romanian economy. This will proceed at a moderate pace, after having assessed the impact of previous measures.
In today’s meeting, the NBR Board has examined and approved the quarterly Inflation Report, which reiterates the outlook for a sharp, albeit temporary, decline in the annual inflation rate in the first half of 2014, amid the protracted transitory impact of the plentiful harvest in 2013 and the lower VAT rate for some bakery products. Subsequently, the annual inflation rate is expected to return inside the variation band of the flat 2.5 percent target, on the back of the statistical base effect, and then to remain in the upper half of this band, largely due to administered price adjustments and the gradual narrowing of the negative output gap as economic activity picks up.
Risks associated with the new projection relate to capital flow volatility amid the variability of investors’ risk appetite and the changes in exposure to the emerging economies, given the decisions taken by major central banks across the world and the ongoing cross-border deleveraging in the banking system. On the domestic front, relevant risks are triggered by the dynamics of implementing structural reforms in the context of the upcoming elections.
Against this backdrop, the Board of the National Bank of Romania has decided to lower the monetary policy rate to 3.50 percent per annum from 3.75 percent previously. Hence, starting with 5 February 2014, the interest rate on the NBR’s lending facility (Lombard) will be lowered to an annual 6.50 percent from 6.75 percent, while its deposit facility rate will stand at 0.50 percent per annum. The NBR Board has also decided to continue to pursue adequate liquidity management in the banking system and to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The gradual tailoring of broad monetary conditions aims to safeguard price stability over the medium term in line with the 2.5 percent flat annual target.
This conduct paves the way for a sound recovery of lending to the private sector, as the effect of the previous monetary policy adjustments (concerning policy rate and minimum reserve requirements) has yet to be fully incorporated.
Moreover, the consistent implementation of an adequate macroeconomic policy mix, in line with the precautionary external financing arrangement signed with the international financial institutions, along with balanced social and political developments during the electoral year 2014, is key to consolidating the stability and the growth prospects of the domestic economy, thereby enhancing its resilience to external shocks.
The NBR reiterates that it will closely monitor domestic and global economic developments so as, via the calibration of the monetary policy conduct and the adequate use of its available tools, to ensure price stability over the medium term and financial stability.
The new quarterly Inflation Report will be released to the public in a press conference on 6 February 2014, when the new calendar on NBR Board meetings dedicated to monetary policy issues for the next 12 months is announced.
Video (Romanian only):
» Press briefing, 4 February 2014
» Press conference, 6 February 2014 - quarterly inflation report