Banca Naţională a României

The annual inflation rate eased to 8.46 percent in May 2008 from 8.62 percent in the previous month, but continued to stay significantly above the upper limit of the variation band around the target for this year. Moreover, the adjusted CORE2 annual 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 further to an annual 7.6 percent in May from 7.1 percent in the previous month.

The developments in core inflation reveal both the persistent excess demand and the ongoing effects of supply-side shocks.

The analysis of the most recent statistical data illustrates that domestic demand has been the main driver of economic growth in 2008 Q1 as well. Both investment and final household consumption sped up, the latter being driven by significant rises in incomes and the persistently rapid increase of credit to the private sector, especially that of foreign currency-denominated loans. Increased government spending has additionally boosted aggregate demand. These developments are reflected in the persistence of the external deficit at levels difficult to sustain in the long term, as well as in still high inflation rates.

Wage growth stayed above labour productivity dynamics, fuelling inflationary pressures as well as the risk of deteriorating external competitiveness.

The annual rise of credit to the private sector has edged down marginally, but its level remains excessively high, especially in what concerns foreign currency lending to households. Household indebtedness has reached levels that require close monitoring.

The short-term inflation outlook has worsened in the context of forthcoming increases in some administered prices (natural gas and electricity) and in tobacco excise duties.

The need to effectively anchor inflation expectations by avoiding their additional worsening against the background of global market tensions requires the continuation of monetary policy restrictiveness with an appropriate dosage of its instruments, while also calling for stronger support from other components of the economic policy mix.

In light of available data, the NBR Board has decided to raise the monetary policy rate to 10.0 percent per annum from 9.75 percent. In this context, starting from June 27, 2008 the interest rate on the NBR deposit facility is raised to an annual 6.0 percent from 5.75 percent while the rate on its lending facility (Lombard rate) will stand at an annual 14.0 percent versus 13.75 percent previously. Also, the penalty rate for deficits of leu-denominated minimum required reserves will rise to an annual 21.0 percent from 20.5 percent starting with the July 24-August 23, 2008 maintenance period.

The NBR Board has also decided to continue to pursue a firm management of money market liquidity via open-market operations and to leave unchanged the existing minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The NBR Board 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 the resumption of disinflation at a pace consistent with the aim of achieving the announced medium-term inflation targets in a sustainable manner.

The NBR Board is restating that, apart from tighter monetary policy, the implementation of a restrictive economic policy mix, focusing on the fiscal and income components, and stepped-up structural reforms are essential to ensure the resumption of a durable downward trend in inflation, thus contributing to the achievement of sustainable economic growth in the longer term.

The next NBR Board meeting dedicated to monetary policy is scheduled for July 31, 2008, when a new quarterly Inflation Report is to be examined