The NBR Board has decided to cut the policy rate to 14.5 percent and keeps inflation target for 2005 at 7 percent
14.03.2005
The NBR Board has decided to cut the policy rate to 14.5 percent.
The NBR Board keeps inflation target for 2005 at 7 percent, reiterating the commitment to proceed to the next stage of capital account liberalisation by 30 June, as a step forward to EU accession.
In its meeting on 12 March 2005, the NBR Board analysed the latest developments in real economy and financial and monetary sector as well as their prospects for 2005. The discussions focused on the final stages of capital account liberalisation and their impact on macroeconomic conditions in general and the Romanian financial market in particular.
The analysis has underscored the strengthening of disinflation. Following the 0.6 percent increase in prices in February, the 12-month inflation rate remained below 9 percent. The lingering effects of budget deficit widening in November and December 2004, the sharp growth of disposable incomes of employees and corporate sector in recent months, as well as the nominal drop in deposit rates were offset by good performance of consolidated budget in early 2005, the advance in output and labour productivity, and the appreciation trend of the domestic currency. Thus, even though the rise in energy prices and excise duties to gradually reach EU standards are expected to have a temporary negative bearing on consumer prices, the NBR Board considers the 7 percent inflation target for 2005 to be a realistic one, amid maintenance of an adequate economic policy mix and achievement of the EU accession objectives.
Against this backdrop, following the technical consultations with European Commission officials in Brussels on 10 March 2005, the NBR Board established the safeguard measures that may be applied along with the next stage of capital account liberalisation; such measures will be transposed into the regulations to be issued by the NBR. The safeguard measures could be resorted to in case of excess short-term capital flows, should their size lead to balance of payments disequilibria or severe disturbances of monetary and exchange rate policies that might entail considerable swings in domestic liquidity.
The analysis of the latest banking developments has highlighted a downtrend in interest rates on NBR deposit-taking operations conducted via auctions with a view to mopping up excess liquidity in ROL. This trend is confirmed by the extent to which banks accept to adjust their interest rates to inflation rate developments and bring them to levels consistent with the next stage of capital account liberalisation. However, given the need to maintain the consistency between the anti-inflationary monetary policy and the liberalisation of capital account operations, the NBR Board has decided to retain the cautious approach to cutting the policy rate, which was set at 14.5 percent. The policy rate is expected to gradually near the market rate, insofar as progress in achieving the objectives of both disinflation and economic policy mix pursued by the authorities is made.