In its meeting of February 4, 2008, the Board of the National Bank of Romania has decided the following:
- to raise the monetary policy rate to 9.0 percent per annum from 8.0 percent;
- to continue to pursue a firm management of money market liquidity via open-market operations;
- to adopt additional prudential rules, including higher provisioning for foreign exchange-denominated credits extended to unhedged borrowers;
- 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 will be released to the public in a press conference scheduled for February 7, 2008, along with a 12-month calendar of NBR Board meetings dedicated to monetary policy issues.
The annual inflation rate stood at 6.57 percent at the end of last year against 4.87 percent in December 2006, overshooting the 3-5 percent target band around the 4.0 percent target.
The overshooting was triggered mainly by supply-side exogenous shocks: an unfavourable performance of the farming sector due to severe drought as well as rising global food and fuel prices. Inflationary pressures have been amplified by persistent excess demand as a consequence of strong wage increases and fast growth of credit to the private sector.
Statistical data show continued robust investment dynamics and an unsustainable pace of consumption growth which led to a widening of the external deficit. In the context of the changing risk appetite by financial investors amid persistent turbulences on international financial markets, these unfavourable trends have also been associated with the significant correction of the leu exchange rate in recent months.
In the monetary area, it is worth noting the fast growth of foreign currency loans, which, in the context of increased and persistent exchange rate volatility, underlines the issue of potential risks to financial stability.
The monetary policy stance, assessed through broad monetary conditions, saw its restrictiveness adjusted by the raise in the key monetary policy rate, by a firmer control of money market liquidity and the maintenance of tight minimum reserve requirements.
The short-term inflation outlook has worsened in the context of heightened macroeconomic risks, especially those related to the effects of rising household incomes and higher public spending in the run-up to forthcoming elections as well as uncertainties over the leu exchange rate trend amid persistent tensions affecting the world economic environment.
Therefore, the NBR is restating that it is ready to adjust its instrument-settings to reenter as fast as possible the announced disinflation trajectory in a sustainable manner. As the NBR's main concern remains the efficient anchoring of inflation expectations of both businesses and households at low levels of inflation, it is essential that the temporary forecast deviation of inflation outside the target band should not trigger any relaxation of wage and fiscal policies.
A return of inflation to a downward trajectory compatible with achieving the medium-term disinflation objectives and the progress in the nominal and real convergence process requires tighter monetary policy and increased consistency of the entire economic policy mix.
Under such circumstances and in light of available data, the NBR Board has decided to adopt a set of measures to tighten monetary policy.
Given the need to pro-actively adapt broad monetary conditions to an anticipated rise in inflation in the following period, the NBR Board has decided to raise the monetary policy rate to 9.0 percent per annum from 8.0 percent and continue to pursue a firm management of money market liquidity via open-market operations.
Moreover, given the rapid expansion of all components of non-government credit and especially of the foreign currency component, the NBR Board has also decided to leave unchanged the existing minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions and to adopt additional prudential measures, including higher provisioning for foreign exchange-denominated credits extended to unhedged borrowers (Regulation No 5/2002, as subsequently amended) and broadening their scope to non-bank financial institutions.
The transposition of the new prudential measures into the internal regulations of credit institutions and non-bank financial institutions should be done within 30 days from their publication in the Official Gazette.
The NBR Board believes tighter monetary policy measures, along with the implementation of moves to tighten fiscal and income policies and foster structural reforms, especially those concerning the labour market, are essential to ensure an efficient anchoring of inflation expectations of both corporates and households and the achievement of the medium-term disinflation objectives in a sustainable manner.
Such a stance of all components of the macroeconomic policy mix is all the more necessary given that the external deficit registers levels difficult to sustain in the context of heightened uncertainties affecting the world economy, while a boost in savings represents a longer-term fundamental measure aimed at correcting the external deficit, through a gradual reduction of the savings/investment imbalance.
The NBR Board has examined and approved the quarterly Inflation Report, which assesses the recent macroeconomic context and the inflation outlook, as well as the main challenges and risks to monetary policy in the coming period.
The present forecast reveals risks similar to those underlined in the previous forecasting exercise. However, it is worth mentioning that in the event of such risks materializing they could have more severe consequences given the current international context.
Under these circumstances, the NBR reaffirms that it will vigilantly monitor developments in macroeconomic indicators and their outlook, standing ready to adjust its instrument settings to counteract inflationary pressures in order to resume as fast as possible the announced medium-term disinflation trajectory in a sustainable manner. The NBR Board is reiterating that it will carefully monitor global economic developments and analyze the effects of persistent international financial market turbulences on the Romanian economy.
The new quarterly Inflation Report will be released to the public in a press conference scheduled for February 7, 2008, along with a 12-month calendar of NBR Board meetings dedicated to monetary policy issues.