In its meeting of 4 August 2015, the Board of the National Bank of Romania decided the following:
- to keep unchanged the monetary policy rate at 1.75 percent per annum;
- 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 Board has examined and approved the new quarterly Inflation Report, which will be released to the public in a press conference scheduled for 6 August 2015.
The latest statistical data confirm the fall of annual inflation rate into negative territory under the impact of broadening, as of 1 June 2015, the scope of the reduced VAT rate to all food items and public food services. In the same period, economic growth gained momentum, driven by the substantial pick-up in final consumption and by the positive investment dynamics, also against the backdrop of the recovery in lending.
In June 2015, the annual inflation rate slipped to -1.6 percent, from 1.2 percent in the previous month. The disinflationary shock which has stemmed from the first-round effects of the cut in the VAT rate on food items, to 9 percent from 24 percent, and which has impacted the prices of nearly 30 percent of the goods and services included in the consumer basket was stronger than expected. Statistical data show that food prices for which the VAT rate was cut have fallen by 9.8 percent in June versus May.
The average annual inflation rate dropped to 0.7 percent and the average annual inflation rate based on the Harmonised Index of Consumer Prices, which is relevant for assessing convergence with the European Union, went down to 1.0 percent, from 1.1 percent.
Monetary indicators reveal the real annual rate of change of credit to the private sector returning to positive territory, given the expansion in domestic currency loans (up by a real 15 percent year on year in June 2015), amid gradual easing of the monetary policy stance over the past year via the entire range of tools: policy rate cuts, narrowing of the symmetrical corridor of interest rates on the NBR’s standing facilities around the policy rate, reduction in minimum reserve requirements ratios and adequate liquidity management.
The stock of forex loans kept narrowing, with their share in total credit to the private sector reaching 52.4 percent in June 2015, compared to a peak of 64.4 percent in May 2012. This development is beneficial in terms of strengthening the monetary policy transmission and mitigating the risks to financial stability.
At global level, the recent period is characterised by still tepid economic recovery and heightened volatility on foreign financial markets, amid the protracted uncertainty relating to the situation in Greece, the economic picture in China, and the diverging monetary policy stances of the world’s major central banks.
On the domestic front, the authorities envisage implementing a number of fiscal policy measures (the package of fiscal easing measures and the updated unified wage law) that have a direct impact on macroeconomic stability and the economic policy mix agreed upon with international institutions under the external financial arrangements.
All these factors, which are likely to affect the global appetite for risk and investor perception regarding the Romanian economy, weigh on the management of domestic macroeconomic policies.
In today’s meeting, the NBR Board has examined and approved the quarterly Inflation Report. Compared to the previous forecast, the updated quarterly projection implies a new substantial revision of the expected path of the annual inflation rate, following the incorporation of the anticipated impact of the fiscal measures recently adopted by Parliament and currently under re-examination. The new forecast shows the annual inflation rate sticking to negative values over the next three quarters, before returning into positive territory, but below the lower bound of the variation band of the flat target, until the beginning of 2017.
However, the strengthening over the short term of the transitory disinflationary impact exerted by the aforementioned fiscal measures masks the build-up of medium-term inflationary pressures, given the faster closing of the negative output gap, followed by the gradual widening of excess demand, along with the pick-up in unit labour costs.
The risks to the inflation outlook stem from both external and domestic developments, relating mainly to the uncertainty about the economic policies in the period ahead and the relations with the international financial institutions.
Under the circumstances and based on currently available data, the Board of the National Bank of Romania has decided to keep unchanged the monetary policy rate at 1.75 percent per annum, to further 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.
The NBR Board is restating that its decisions aim to ensure price stability over the medium term in a manner supportive of economic growth within a sustainable macroeconomic environment, while safeguarding financial stability. To this end, it is necessary for the fiscal policy measures pending implementation not to jeopardise macroeconomic stability, which is an extremely important public asset underlying the currently favourable sentiment towards Romania.
The consistent implementation of an adequate monetary and fiscal policy mix and the progress in structural reforms are pivotal to preserving macroeconomic equilibria, ensuring lasting economic growth, further convergence with the European Union, as well as to enhancing the resilience of the Romanian economy to potential shocks or adverse conditions worldwide.
The NBR reiterates that it monitors on an ongoing basis both domestic developments and the international economic environment so as – via the adequate use and dosage of all its available tools – to ensure the achievement of the overriding objective of maintaining price stability over the medium term, along with preserving financial stability.
The new quarterly Inflation Report will be presented to the public in a press conference on 6 August 2015. In line with the approved calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for 30 September 2015.
» Video: Press briefing, 4 August 2015 (Romanian only)