In its meeting of July 31, 2007, the Board of the National Bank of Romania has decided the following:
- To keep the monetary policy rate unchanged at 7.0 percent per annum;
- To adjust some of the instruments of the monetary policy operational framework in order to enhance the signaling role of the monetary policy rate and reduce interbank money market rates volatility via:
- raising of the interest rate on its deposit facility to an annual 2.0 percent from 1.0 percent;
- lowering the interest rate on its lending facility (Lombard rate) to an annual 12.0 percent from 14.0 percent;
- To reduce the maturity for its deposit taking open-market operations to two weeks from one month;
- To cut the penalty rate for deficits of leu-denominated minimum reserves to an annual 18.0 percent from 21.0 percent starting with the August 24-September 23, 2007 maintenance period;
- To set the 2009 inflation target at 3.5 percent, with a target band of +/- one percentage point.
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 6, 2007.
The recent developments in macroeconomic indicators show a disinflation process consistent with the aim to attain this year's inflation target, a mild slowdown of economic growth dynamics under the negative impact from agriculture as well as a persistent widening of the current account deficit.
The year-on-year inflation rate stood at 3.8 percent in June, unchanged from the previous month, consolidating its position below the 2007 target and falling from 4.87 percent in December 2006.
Core inflation, excluding the effects of excise duties on tobacco and alcohol, dropped further - to 2.65 percent year-on-year in June from 2.7 percent in the month before and 3.0 percent in December 2006 - as broad monetary conditions remained restrictive against the background of a more pronounced appreciation of the leu.
In the monetary area, a relative reduction of the dynamics of the non-government credit expansion is to be noted again. Meanwhile, the money market witnessed increased volatility in the levels of liquidity and interbank rates. This situation requires an adjustment of the corridor of interest rates on the standing facilities offered by the monetary authority to credit institutions, meant also to consolidate the signaling role of the monetary policy rate for the interbank market which is a key link for the monetary signal transmission to the economy.
In light of the available data, the NBR Board has decided to keep the monetary policy rate unchanged at 7.0 percent per annum and to reconfigure the instruments of the operational framework, with the aim of gradually aligning to European Central Bank practice.
Therefore, the NBR Board has decided to raise the interest rate on its deposit facility to an annual 2.0 percent from 1.0 percent, to lower the interest rate on its lending facility (Lombard rate) to an annual 12.0 percent from 14.0 percent and reduce the maturity for its deposit taking open-market operations to two weeks from one month along with keeping their frequency unchanged (weekly, on Mondays).
The NBR Board has also decided to cut the penalty rate for deficits of leu-denominated minimum reserves to an annual 18.0 percent from 21.0 percent starting with the August 24-September 23, 2007 maintenance period.
Meanwhile, the NBR Board is restating that the monetary authority will continue to pursue an adequate control of liquidity via open-market operations in line with financial market conditions and leaves 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 context and inflation outlook, as well as the main challenges and risks to monetary policy in the coming period.
The medium-term inflation outlook indicates a continuation and a consolidation of disinflation. However, pressures related to an increase in incomes insufficiently supported by productivity gains, growing government spending, as well as uncertainties related to investors' attitude vis a vis emerging markets, the calendar of administered price adjustments and the impact of drought on food prices require the maintenance of a cautious monetary policy stance.
Following an assessment of the new forecast taking into account the need to continue disinflation in the medium term, in line with the euro adoption calendar as well as of the medium-term risks and uncertainties related to the inflation outlook, especially the factors outside the central bank's authority, the NBR Board has set the 2009 inflation target at 3.5 percent, with a target band of +/- one percentage point.
The 2009 target, also assumed by the government, is in line with the need to achieve a sustainable medium-term inflation rate in the context of the ongoing convergence with the European Union - a process that requires sustained financial and economic efforts underpinned by an adequate macroeconomic policy mix.
The new quarterly Inflation Report will be released to the public in a press conference scheduled for August 6, 2007. Also, according to the announced calendar, the next NBR Board meeting dedicated to monetary policy is scheduled for September 26, 2007.