In its meeting of January 7, 2008, the Board of the National Bank of Romania has decided the following:
- to raise the monetary policy rate to 8.0 percent per annum from 7.5 percent;
- to continue to pursue a firm management of money market liquidity via open-market operations;
- to leave unchanged the existing minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The analysis of the most recent statistical data reveals a continued high dynamics of domestic demand as investments picked up and consumption remained at an unsustainable level in the context of a rapid expansion of credit to the private sector, especially foreign currency loans.
The rise of aggregate demand, boosted mainly by higher incomes and non-government credit dynamics, has been faster than the aggregate supply advance, causing exogenous shocks to feed through into prices and making the external deficit widen further. Wage growth stayed above labor productivity dynamics, and, besides the pressures exerted on the aggregate price level, has also emphasized the risks of deteriorating external competitiveness.
Year-on-year inflation was 6.67 percent in November 2007, remaining above the upper limit of the target band, due to a steep increase in food prices and in the tariffs of services indexed to the leu's exchange rate.
The short-term inflation outlook has worsened in the context of heightened macroeconomic risks, especially those related to the income policy and higher public spending in the run-up to forthcoming elections as well as uncertainties over investors' appetite for emerging market risk. Given this context, it is essential that a temporary inflation deviation outside the target band should not trigger relaxed wage and fiscal policies. The restrictiveness of the entire macroeconomic policy mix will help attain the inflation objectives agreed upon with the government, thus resuming the downward trend in inflation as well as ensuring sustainable economic growth in the medium term.
The NBR Board believes that the persistence of demand-side pressures, along with prospects for prolonged effects of supply-side shocks, as well as the risks related to a possibly significant deterioration of inflation expectations require a tighter monetary policy stance.
In light of available data, the NBR Board has decided to raise the monetary policy rate to 8.0 percent per annum from 7.5 percent. The NBR Board has also decided to continue to pursue a firm management of money market liquidity via open-market operations and to leave unchanged the existing minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
These measures will ensure restrictiveness of broad monetary conditions in line with the aim of attaining medium-term disinflation objectives. Maintaining the already announced inflation targets, which were also agreed upon with the government, i.e. 3.8 percent for 2008 and 3.5 percent for 2009 plus/minus one percentage point, and implementing a restrictive economic policy mix will lead to an efficient anchoring of inflation expectations of both corporates and households in the context of uncertainties that plague the world economy.
The NBR will vigilantly monitor developments in macroeconomic indicators and their outlook, both domestically and internationally, standing ready to adjust its instrument settings to counteract inflationary pressures in order to resume the assumed disinflation trajectory and achieve medium-term disinflation objectives in a sustainable manner.
The next NBR Board meeting dedicated to monetary policy is scheduled for February 4, 2008, when a new quarterly Inflation Report