At the meeting on 29 October 2004, the NBR Board reviewed all macroeconomic indicators, including the developments in foreign direct investment and portfolio investments, proceeds from privatisation, current transfers and other capital inflows in the first nine months of 2004. It proved that all segments recorded significantly higher performances, leading to the rise in the forex reserves with the central bank by over EUR 3.5 billion since the beginning of the year, against the background of keeping the balance of payments current account deficit below 6 percent of GDP.
Although in recent years imports for the cold season generally caused the foreign exchange surplus to decline, in October 2004, the NBR continued to purchase foreign currency off the forex market, buying another EUR 218.1 million, a fact which, correlated with other data, hints at a structural and sustainable improvement of capital inflows.
Considering the new state of affairs, the Board decided to pursue a more flexible exchange rate of the ROL by limiting the interventions of the central bank in the forex market. Moreover, the Board resolved that, from now on, no forecasted spread of real appreciation of the ROL exchange rate would be made public, which invalidates any expectation of an impending depreciation of the domestic currency as a result of the NBR's intervention. The greater flexibility of the exchange rate goes hand in hand with the switch to inflation targeting and the next stages of capital account liberalisation.
Given the capital inflows in this period, the ROL may strengthen in real terms, which is indicative of the considerable monetary policy tightening. Such an option is justified by some inflationary pressures caused by the soaring world oil price as well. Behind the larger appreciation of the ROL exchange rate stood the rise in labour productivity across industry and the positive trend towards improved export composition.
Monetary policy tightening through stronger real appreciation of the ROL will help bolster disinflation further. As a matter of fact, despite some higher-than-expected price hikes in the past few months, the 12-month consumer price index fell from 14.1 percent in December 2003 to 11.1 percent in September 2004. The NBR Board decided to lower the policy rate by half of a percentage point to 18.25 percent in order to confirm further disinflation.
The cut in the nominal policy rate was 3 percentage points in June-October 2004, thus sending the real policy rate back to the level recorded at end-2003.
As all aggregate demand components (public and private consumption, gross capital formation and exports) are expected to rise in the period ahead, the NBR Board decided to maintain a cautious monetary policy stance in order to meet the inflation target.