The Board of the National Bank of Romania has decided to raise the minimum reserve requirement ratio on foreign currency-denominated liabilities to 35 percent from 30 percent, tighten control over liquidity and measures to reduce credit growth, standing ready to use its entire array of instruments to counter growing inflationary pressures.
The NBR Board believes that growth of consumption is unsustainable, a trend which implies a tighter economic policy mix to safeguard the continuation of disinflation in the medium and long run.
In its meeting of December 21, 2005, the NBR Board has assessed the latest developments in macroeconomic and financial market indicators as well as their prospects in the context of the macroeconomic and structural measures to be implemented in 2006.
Latest data show year-on-year inflation quickened to 8.7 percent in November - under the impact of administered price adjustments - revealing the prospect of a year-end figure slightly above 8.5 percent, the upper limit of the 2005 target band.
The expected marginal overshooting of this year's target band came as a result of supply-side shocks (steep adjustments in administered and fuel prices as well as in excise duties) but also due to pressures on the domestic demand side.
However, annual average inflation is estimated at around 9.0 percent versus 11.9 percent in the previous year, signaling a consolidation of the disinflation process. Moreover, core inflation, which measures free prices and those with low volatility is slowing down, with CORE2 computed by the NBR (CPI less administered prices and prices of vegetables, fruit, eggs and fuel) falling to 6.2 percent in November 2005 from 8.3 percent in December 2004.
Developments in the macroeconomic area reveal a notable deceleration of the increase in domestic supply and productivity, while consumption growth stayed strong, at levels similar to the same period of 2004. The increase in domestic demand still significantly exceeds domestic output, thereby sharpening the external imbalance and fueling lasting inflationary pressures.
The NBR Board has assessed the current economic conditions, both domestically and internationally, as well as the associated risks and uncertainties, and has decided to tighten control over liquidity and measures to slacken credit expansion.
In this context, the NBR Board has decided to raise the minimum reserve requirement ratio on foreign currency-denominated liabilities to 35 percent from 30 percent.
Given the forthcoming adjustments in administered prices, the fiscal position and of other economic policies envisaged for 2006, the NBR Board is ready to resort to its entire array of instruments to counteract growing inflationary pressures in the period ahead.
According to the announced calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for February 8, 2006, when the third quarterly Inflation Report is to be analyzed.