Banca Naţională a României

The annual inflation rate climbed to 8.63 percent in March 2008 from 6.57 percent in December 2007. The increase was mainly due to the cumulative effects of: the persistence and amplitude of supply-side shocks, increasing pressures arising from excess demand, depreciation of the national currency and worsening inflation expectations.

The inflationary impact of supply-side factors was heightened by the persistent pressures related to a substantial increase of incomes and the continued acceleration of the expansion of credit to the private sector, and is also reflected by the rapid growth of adjusted CORE2 inflation. The adjusted CORE2 inflation rate - calculated by excluding the impact of administered and volatile prices (vegetables, fruit, eggs and fuel) as well as the effect of vice tax - rose to an annual 6.81 percent in March 2008 from 5.45 percent in December 2007.

Given the recent macroeconomic trends and their outlook as well as the need to ensure a firm anchoring of inflation expectations in order to bring annual price growth as fast as possible, in a sustainable manner, within the medium-term disinflation trajectory agreed with the government, the NBR Board has decided to raise the monetary policy rate to 9.75 percent per annum from 9.5 percent and to adjust some features of the monetary policy operational framework as follows:

1. to reduce the maturity for its deposit taking open-market operations to one week from two weeks, effective starting with the following auction for such open-market operations. The weekly frequency for organising the auctions for such deposits remains unchanged.
2. to set up a symmetrical corridor of ?4 percentage points around the monetary policy rate for the interest rates on the NBR standing facilities. Therefore, starting from May 7, 2008 the interest rate on the NBR deposit facility is raised to an annual 5.75 percent from 2.0 percent while the rate on its lending facility (Lombard rate) will stand at an annual 13.75 percent versus 12 percent previously.
3. to raise the penalty rate for deficits of leu-denominated minimum reserves to an annual 20.5 percent from 18 percent starting with the May 24-June 23, 2008 maintenance period.

These adjustments of the monetary policy operational framework, part of a gradual alignment to European Central Bank practice, are aimed at consolidating the signalling role of the monetary policy rate, at increasing the efficiency of open-market operations and reducing the volatility of interbank money market rates.

The NBR Board has examined and approved the quarterly Inflation Report, which assesses the recent macroeconomic context and inflation outlook, as well as the main challenges and risks to monetary policy in the coming period.

The present forecast shows that annual inflation is likely to temporarily remain above the upper limit of the variation band around the target in the following months and reveals risks similar to those underlined in the previous forecasting exercise, while it is worth mentioning that these risks could be exacerbated by the growing uncertainties that affect the global economic environment.

In the current macroeconomic context, the NBR Board is restating that the implementation of a coherent mix of restrictive monetary, fiscal and income policies and stepped-up structural reforms are essential to bring inflation during 2009 towards the trajectory compatible with attaining the announced target.

The NBR Board will continue to closely monitor developments in macroeconomic indicators and to assess their outlook, in a bid to permanently ensure the broad monetary conditions needed to counteract inflationary pressures and attain the medium-term disinflation objectives in a sustainable manner.

The next NBR Board meeting dedicated to monetary policy is scheduled for June 26, 2008.