In its meeting of 4 August 2014, the Board of the National Bank of Romania decided the following:
- To lower the monetary policy rate to 3.25 percent per annum from 3.50 percent starting with August 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 examined and approved the quarterly Inflation Report which will be presented to the public in a news conference scheduled for August 6, 2014.
The analysis of the latest macroeconomic data shows the annual inflation rate remaining on a downward path and temporarily running below the lower bound of the variation band of the flat target. The new projected inflation path is significantly lower than that forecasted in May.
Behind this stood one-off factors (the dynamics of volatile food prices, the nominal appreciation of the local currency, the influence of import prices partly reflecting subdued euro area inflation) overlapping with the persistent effects of the negative output gap and the downward adjustment in inflation expectations.
The annual inflation rate fell to a new historic low of 0.66 percent in June 2014 from 0.94 percent in the previous month and 1.55 percent in December 2013. At the same time, the average annual inflation rate came in at 1.7 percent in June 2014 compared to 2.1 percent in May. The average annual inflation rate based on the Harmonised Index of Consumer Prices – which is relevant for ensuring comparability at European level and assessing convergence with the European Union – continued to decrease, reaching 1.5 percent in June versus 1.8 percent in May. Romania thus ranks among the countries meeting the corresponding nominal convergence criterion at EU level.
The improvement in economic activity in Romania has further been fostered by the favourable performance of industrial output, fuelled mainly by external demand growth and the gradually rebounding domestic demand, amid a further narrow current account deficit. The international reserves remain in a comfortable zone while a substantial part of the IMF loan under the 2009-2011 arrangement has been repaid.
The annual dynamics of total credit to the private sector fell deeper into negative territory, solely on account of the steeper decline in the rate of change of the foreign currency component, whereas the annual pace of increase in real terms of leu-denominated credit gained momentum and peaked at a five-year high in June. Consequently, the share of foreign exchange loans in total credit to the private sector (stocks) continued to narrow to 58 percent at end-June 2014 against 62 percent in June 2013, thus helping consolidate the monetary policy transmission mechanism.
In today’s meeting, the NBR Board examined and approved the quarterly Inflation Report, which points to the outlook for the annual inflation rate to run at markedly lower readings than previously forecasted, i.e. below the midpoint of the flat target until mid-2015 and in the upper half of the variation band in the latter part of the projection horizon. According to the new projection, the annual inflation rate will be 2.2 percent at end-2014 and 3 percent at end-2015, while the average annual inflation rate is anticipated to stand at 1.4 percent in 2014 and 2.4 percent in 2015.
Similarly to the previous assessments, the risks associated with this outlook stem chiefly from external sources, being largely generated by possibly higher volatility of capital flows in Romania following unfavourable developments in investors’ risk aversion to the emerging economies.
This could materialise amid the recent geopolitical and regional tensions, the ongoing cross-border deleveraging and restructuring of some Eurozone banking groups, as well as in the context of uncertainty surrounding the impact of possible monetary policy stance adjustments by major central banks worldwide.
Domestically, the main risks relate to the persistence of uncertainties about the consistent implementation of the set of structural reforms and other measures agreed with international institutions in the context of elections later this year.
Against this background, the Board of the National Bank of Romania has decided to lower the monetary policy rate to 3.25 percent per annum from 3.50 percent previously. Hence, starting with 5 August 2014, the interest rate on the NBR’s lending facility (Lombard) will fall to an annual 6.25 percent from 6.50 percent and its deposit facility rate will stand at 0.25 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, reiterating that their harmonisation with European levels over the medium term will carry on gradually, at an appropriate pace and time, conditional on the economic and financial environment domestically and externally.
These decisions help attain the overriding objective of preserving medium-term price stability as well as financial stability, together with paving the way for balanced and lasting economic growth.
In this context, the consistent implementation of an adequate macroeconomic policy mix, in line with the provisions of the external financing arrangements, and the resumption, by observing prudential rules, of financial intermediation in parallel with an appropriate remuneration of bank deposits, conducive to fostering domestic saving, are pivotal to consolidating favourable prospects for the Romanian economy, thereby enhancing its resilience to external shocks.
The NBR monitors closely the domestic and global economic developments so as, by calibrating the monetary policy conduct and making adequate use of its available tools, to maintain medium-term price stability and preserve financial stability.
The new quarterly Inflation Report will be presented to the public in a news conference on 6 August 2014. According to the approved calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for 30 September 2014.
Video (Romanian only):
» Press briefing, 4 August 2014
» Press conference, 6 August 2014 - quarterly inflation report