In its meeting of October 31, 2007, the Board of the National Bank of Romania has decided the following:
- to raise the monetary policy rate to 7.5 percent per annum from 7.0 percent;
- to continue to pursue a prudent management of financial 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 NBR Board has examined and approved the quarterly Inflation Report, which will be released to the public in a press conference scheduled for November 5, 2007.
According to statistical data, year-on-year inflation rose to 6.03 percent in September mainly due to a steep increase in food prices and an adverse impact of the correction in the leu exchange rate against the background of recent turbulence on world financial markets.
Beyond the anticipated base effect, this year's severe drought has a detrimental impact on both food prices - which also increased following significant rises of these prices on world markets - and on the dynamics of GDP, which reveals the volatile annual performance of Romania's agricultural sector.
The broader analysis of economic developments shows a relative slowdown of economic growth, attributable to the negative supply-side shock triggered by farming sector output, with consumption remaining at unsustainable levels, as also revealed by the persistent worsening of Romania's external deficit.
Credit expansion has stayed alert in the context of renewed fast growth of foreign currency lending, which accounted for 51.5 percent of the end-September stock of non-government credit.
The monetary policy stance, assessed via broad monetary conditions, remained prudent in the context of a pre-emptive tightening of money market liquidity control and of the maintenance of restrictive minimum reserve requirements.
The persistence of negative supply-side effects, high household income dynamics, the projected rise in public spending towards year-end, as well as uncertainties over leu exchange rate movements signal that end-2007 inflation will exceed the upper limit of the 3-5 percent target band. However, average annual inflation, estimated at around 4.7 percent versus 6.56 percent in 2006, shows a consolidation of the disinflation process this year. Nevertheless, the risk of a prolonged deviation of inflation from the target through part of 2008 tends to diminish the favourable impact of this consolidation and to affect the inflation expectations of corporates and households.
Therefore, the NBR is stressing that monetary policy, along with all components of the macroeconomic policy mix, should ensure a firm and sustainable anchoring of inflation expectations at the low levels achieved as yet, in order to bring annual price growth within the medium-term disinflation trajectory agreed with the Government and, on a broader horizon, to achieve the convergence of Romania's aggregate price level towards price stability, as defined by the EU. Such a stance of all components of the macroeconomic policy mix is all the more necessary given that the external deficit registers levels difficult to sustain on a longer term in the context of heightened uncertainties that affect the world economy.
Thus, in light of available data, the NBR Board has decided to raise the monetary policy rate to 7.5 percent per annum from 7.0 percent and to continue to pursue prudent liquidity management via open-market operations. This monetary policy orientation seeks also to ensure an appropriate real interest rate level aimed at stimulating savings and improving the savings-investment ratio, with an impact on the gradual reduction of the external deficit.
Moreover, given the fast increase in all components of non-government credit, the NBR Board has also decided to leave unchanged the existing 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 assesses the recent macroeconomic context and inflation outlook, as well as the main challenges and risks to monetary policy in the coming period. The new quarterly Inflation Report will be presented to the public in a press conference scheduled for November 5, 2007.
The new forecast of the medium-term economic developments underscores heightened and more complex risks, especially those related to a rise in incomes insufficiently supported by productivity gains, higher public spending in the run-up to successive forthcoming elections and uncertainties over investors' appetite for emerging markets risk. Therefore, the NBR reiterates that it will vigilantly monitor developments in macroeconomic indicators and their outlook, both domestically and internationally, standing ready to adjust its instrument settings in order to achieve medium-term disinflation objectives in a sustainable manner and make further advance in the convergence process with the European Union.
The next NBR Board meeting dedicated to monetary policy is scheduled for January 7, 2008.