In its meeting of June 27, 2006, the Board of the National Bank of Romania has decided the following:
- To raise the monetary policy rate to 8.75 percent per annum from 8.5 percent;
- To increase to 20 percent from 16 percent the minimum reserve requirements on leu-denominated liabilities with maturities of up to two years starting with July 24 - August 23, 2006 maintenance period;
- To continue to pursue a firm control of money market liquidity by significant sterilization of excess liquidity via open-market operations.
The NBR Board is restating that it will continue to vigilantly monitor the monetary and macroeconomic trends, both domestically and internationally, standing ready to react to achieve medium-term disinflation objectives.
The analysis of recent data shows strong domestic demand dynamics driven by an unsustainable expansion of consumption against the background of a rapid increase in non-government credit, especially leu-denominated loans, and of a widening external imbalance.
Leu-denominated household credit rose by 110.5 percent year-on-year in real terms in May.
The expected increase in government spending will additionally boost domestic demand pressure both on the external deficit and on inflation, which requires monetary policy tightening.
Under these circumstances, the NBR Board has decided to raise the monetary policy rate to 8.75 percent per annum from 8.5 percent.
Moreover, in order to slow the persistent and fast-paced non-government credit expansion, especially leu-denominated loans, the NBR Board has decided to increase to 20 percent from 16 percent the minimum reserve requirements on leu-denominated liabilities with maturities of up to two years starting with the July 24 - August 23, 2006 maintenance period.
These decisions, together with the maintenance of a firm control of money market liquidity via significant sterilization of excess liquidity, will contribute to monetary policy tightening including through the impact on inflation expectations and help consolidate the disinflation process under which inflation is to converge towards the 4 percent target during 2007.
The NBR is reiterating that it will continue to vigilantly monitor macroeconomic and monetary trends and adjust its instruments to counter inflationary pressures.
According to the announced calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled on August 9, 2006, when a new quarterly Inflation Report is to be analyzed.