In its meeting of November 2, 2010, the Board of the National Bank of Romania has decided the following:
- to keep unchanged the monetary policy rate at 6.25 percent per annum;
- to pursue an adequate management of liquidity 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.
At the same time, the NBR Board decided to maintain the 2012 inflation target at 3 percent ±1 percentage point, and to adopt, as from 2013, a flat multi-annual inflation target of 2.5 percent ±1 percentage point. The assumed targets will be discussed with the government.
The NBR Board has examined and approved the quarterly Inflation Report, which will be released to the public in a press conference scheduled for November 4, 2010.
The annual inflation rate went up to 7.77 percent in September 2010 from 7.58 percent the previous month amid a gradual pass-through of the first-round effect of the hike in the standard value added tax rate on 1 July 2010, as well as the unfavourable influences on agri-food product prices of developments on specific domestic and external markets.
At the same time, annual adjusted CORE21 inflation stood at 4.7 percent in September 2010, marginally above the previous month’s level, as the magnitude and the persistence of the aggregate demand deficit offset the adverse impact from the higher VAT rate on the majority of consumer prices included in this basket.
Nevertheless, concerns remain over the possible second-round effects of the VAT rate hike, a potential higher-than-anticipated adjustment in administered prices compared to that envisaged when the forecast was prepared, and uncertainties related to the impact of fiscal consolidation measures given the tense political and social climate, thus requiring a continued prudent monetary policy stance.
In this context, the NBR Board decided to keep unchanged the monetary policy rate at 6.25 percent per annum and to pursue an adequate management of liquidity in the banking system. At the same time, the NBR Board has decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
These decisions are aimed at firmly anchoring inflation expectations in a bid to consolidate prospects to resume disinflation given the persistent uncertainties surrounding domestic developments and the recovery of the global economy.
The NBR Board reaffirms that the return of inflation to a downward path and the emergence of sustainable economic recovery decisively hinge, within a coherent macroeconomic policy mix, on the firm and consistent implementation of fiscal consolidation measures, as well as of structural reforms along with the increase in European funds absorption, in line with commitments set under the multilateral external financing arrangement with the European Union, the International Monetary Fund and other international financial institutions. This is an essential prerequisite for regaining confidence of international financial markets.
Following the assessment of the new projections and of the related risks and uncertainties, mainly those arising from factors beyond the control of monetary policy, which have also arisen from the implementation of the necessary fiscal consolidation, the NBR decided to maintain the 2012 inflation target at 3 percent ±1 percentage point. Moreover, the NBR Board decided that the central bank should adopt, as from 2013, a flat multi-annual inflation target of 2.5 percent ±1 percentage point. The assumed targets will be discussed with the government.
The shift towards a flat multi-annual inflation target is a beneficial, albeit ambitious, adjustment of the inflation targeting framework that implies a long-term commitment of monetary policy to an objective in line with the definition of medium-term price stability in the Romanian economy. It is meant to ensure the decline in inflation rates to a level compatible with the inflation criterion in the Maastricht Treaty and the ultimate shift to the continuous long-term inflation target, in line with the ECB’s quantitative definition of price stability, without hampering the relative price changes triggered by structural adjustments of the Romanian economy.
The NBR Board has also examined and approved the quarterly Inflation Report, a document that assesses the recent macroeconomic environment and the inflation outlook, and identifies the main challenges and risks to monetary policy in the coming period. The Report will be presented to the public in a news conference scheduled for November 4, 2010.
The NBR Board reaffirms that the NBR will continue to vigilantly monitor domestic and global economic developments so as to ensure, by using its available instruments, the fulfilment of its objectives of achieving and maintaining price stability in the medium term as well as financial stability.
According to the announced calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for January 5, 2011.
1) Calculated by the NBR by excluding administered prices, volatile prices, and tobacco and alcohol prices from the consumer price index.