In its meeting of July 31, 2008, the Board of the National Bank of Romania has decided the following:
- to raise the monetary policy rate to 10.25 percent per annum from 10.0 percent starting August 1, 2008;
- to continue to pursue a firm management of money market liquidity via open-market operations;
- to leave unchanged the existing minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The NBR Board has examined and approved the quarterly Inflation Report, which assesses the recent macroeconomic environment and the inflation outlook, and identifies the main challenges and risks to monetary policy in the coming period. The Inflation Report will be released to the public in a press conference scheduled for August 4, 2008.
The annual inflation rate stood at 8.61 percent in June, almost unchanged versus 8.63 percent in March 2008 but still significantly above the upper limit of the variation band around the target for this year. Moreover, the administered price increases will lead to a temporarily faster growth of annual inflation rate in July.
The continued rise in incomes in excess of labour productivity gains as well as the persistently rapid pace of credit expansion have fuelled inflationary pressures, heightening also the risk of deteriorating external competitiveness.
The adjusted annual CORE2 inflation rate - calculated by excluding the impact of administered and volatile prices (vegetables, fruit, eggs and fuel) as well as the effect of vice tax - climbed to an annual 7.9 percent in June from 7.6 percent in the previous month, due to the persistent impact of inflationary shocks over the past 12 months, reflected also by stronger inflation expectations.
Under these circumstances, further consolidation of monetary policy restrictiveness through an appropriate dosage of its instruments is needed, as well as stronger support from other components of the economic policy mix.
In light of available data and given the need to boost savings and alleviate fast credit growth, the NBR Board has decided to raise the monetary policy rate to 10.25 percent per annum from 10.0 percent.
Therefore, starting from August 1, 2008 the interest rate on the NBR deposit facility is raised to an annual 6.25 percent from 6.0 percent while the rate on its lending facility (Lombard rate) will stand at an annual 14.25 percent versus 14.0 percent previously. Also, the penalty rate for deficits of leu-denominated minimum reserve requirements will rise to an annual 21.25 percent from 21 percent starting with the August 24-September 23, 2008 maintenance period.
The NBR will continue to pursue a firm management of money market liquidity via open-market operations, leaving unchanged the existing minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The NBR Board has examined and approved the quarterly Inflation Report, which will be released to the public in a press conference scheduled for August 4, 2008.
The inflation outlook reveals a slowdown trend in the year-on-year inflation rate starting August as a result of a base effect as well as of the maintenance of restrictive monetary conditions. Nevertheless, macroeconomic risks, especially those related to income policy and increased budget spending in the electoral period, have picked up and might be heightened by rising uncertainties surrounding the global economic environment.
In this context, the NBR Board believes it is essential that the temporary deviation of annual inflation outside the target band should not trigger any relaxation of wage and fiscal policies, considering the need to preserve the main macroeconomic equilibria. Under these circumstances, bringing inflation, in a sustainable manner, within the variation band around the target during 2009 requires the implementation of coherent and restrictive macroeconomic policies (monetary, fiscal and income) as well as stepped-up structural reforms.
The NBR Board has also made a preliminary assessment of the main parameters for setting the 2010 inflation target, taking into account the need to continue disinflation in the medium term in line with the euro adoption calendar as well as the risks and uncertainties related to the inflation performance, especially those pertaining to factors beyond the central bank's control. The 2010 target will be set and announced after the completion of consultations with the Government.
The NBR Board reaffirms that it will vigilantly monitor developments in macroeconomic indicators, standing ready to use the central bank's entire array of instruments to counteract inflationary pressures and to ensure that disinflation will resume at a pace consistent with the aim of achieving the announced medium-term inflation targets in a sustainable manner.
The next NBR Board meeting dedicated to monetary policy is scheduled for September 25, 2008.