In its meeting of March 29, 2012, the Board of the National Bank of Romania decided the following:
- to lower the monetary policy rate to 5.25 percent per annum from 5.50 percent starting with March 30, 2012;
- to ensure adequate management of liquidity in the banking system;
- to maintain the existing levels of minimum reserve requirement ratios on both leu-denominated and foreign currency-denominated liabilities of credit institutions.
The NBR will continue to closely monitor domestic and global economic developments in order to, by accordingly adjusting its available instruments, to ensure the fulfilment of its objectives of achieving price stability, as well as financial stability.
The annual inflation rate continued to slide, reaching 2.6 percent in February 2012 versus 3.14 percent in December 2011. The annual adjusted CORE 21 inflation rate also dropped to 2.05 percent from 2.37 percent in December 2011.
The fall in the annual inflation rate to a record low is the result of the implementation of the economic and financial programme agreed under the external financing arrangements with the European Union, the International Monetary Fund and other international financial institutions. Against the background of keeping adequate real broad monetary conditions, the fading-out of the VAT hike impact and the relatively favourable development in food prices have contributed to a rapid slowdown in inflation.
In this context, the central bank in the autumn of 2011 started a rate-cut and adequate liquidity management cycle, its moves rapidly feeding through into interbank money market rates which fell below the policy rate. Improved money market conditions triggered a steadily downward trend of government securities yields on the primary market, while the secondary market also became more active, with a favourable impact on the redistribution of liquidity in the banking sector.
Nevertheless, tensions and uncertainties related to the euro area sovereign debt crisis have also affected Romania’s banking sector as credit institutions have mutually contained exposures. This had a negative effect on the distribution of liquidity across the banking sector and on the money market, demanding a heightened fine-tuning role of the central bank, in line with European and global trends. These developments, along with the specific loan-to-deposit ratios and the deleveraging process undertaken by some credit institutions, in line with trends at the European level, result in a slower recovery of non-government lending.
Heightened activity in the secondary market for government securities, along with revived confidence of investors and market operators, will thus help alleviate the uneven distribution of liquidity, ensuring a better resource allocation. Statistical data for February 2012 regarding interest rates on loans to the private sector are expected to reveal an ongoing transmission of the monetary signal, especially in the area of corporate lending where the dynamics of new leu-denominated credits are close to those of new foreign currency loans.
The inflation outlook reconfirms a slowdown in both headline and core inflation in the forthcoming period. Developments in macroeconomic indicators show a persistent negative output gap amid the moderating annual growth of industrial output and exports as well as given the increased uncertainties related to the European economic growth outlook.
The statistical base effects will trigger a temporary rise in the annual inflation rate in the second half of 2012 without overshooting the variation band around the 3 percent target. These perspectives confirm the need to maintain adequate real broad monetary conditions in line with the anticipated movements in the annual inflation rate throughout the projection horizon.
In this context, the NBR Board has decided to lower the monetary policy rate to 5.25 percent per annum from 5.50 percent per annum. Thus, starting March 30, 2012, the annual interest rate on the deposit facility will be cut to 1.25 percent from 1.50 percent, while the overnight (Lombard) rate will be 9.25 percent per annum versus 9.50 percent previously.
The NBR Board has also decided to further pursue an adequate management of liquidity in the banking system and keep unchanged the minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The consolidation of inflation within the variation band around the target paves the way for maintaining financial stability and achieving sustainable economic growth. However, domestic risks related to upcoming elections, along with uncertainties regarding developments in the external environment, capital flows and volatile prices require a further judicious adjustment of monetary policy instruments in order to effectively anchor inflation expectations and ensure price stability in the medium run.
The NBR restates that achieving both price and financial stability, in the context of fulfilling the commitments under the external financing arrangements with the EU, the IMF and other international financial institutions, is essential for ensuring lasting economic growth. Increased absorption of European funds along with a gradual revival of domestic demand will secure a sustainable economic recovery.
The NBR reiterates that it will continue to closely monitor domestic and global economic developments in order to ensure the fulfilment of its objectives to achieve price stability, as well as financial stability by adjusting its available instruments accordingly.
In line with the announced calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for May 2, 2012, when the new quarterly Inflation Report is to be examined.
1 Calculated by the NBR by excluding administered prices, volatile prices, and tobacco and alcohol prices from the consumer price index.
» Video: Press briefing, 29 March 2012 (Romanian only)