In its meeting of March 27, 2006, the Board of the National Bank of Romania (NBR) has decided the following:
- to maintain the monetary policy rate at 8.5 percent per annum;
- to continue to significantly sterilize excess liquidity via open-market operations.
The NBR Board reaffirms that it is ready to use the entire available array of instruments to ensure the achievement of its medium-term disinflation goal and consolidate the European Union convergence process.
The analysis of recent developments in macroeconomic and monetary indicators and of their prospects shows the disinflation process is in line with the forecast trajectory, with annual consumer price inflation remaining above the target band (plus/minus one percentage point around the 5 percent target).
In February 2006, year-on-year inflation rate dropped to 8.49 percent from 8.89 percent in the previous month, helped by tight monetary conditions.
In the financial area, broad money saw robust year-on-year growth amid an accelerated rise in demand deposits, while non-government credit expansion continued, supported by a faster increase in leu-denominated loans. It is worth noting that the monetary policy and prudential measures taken by the NBR last year have triggered a deceleration in the dynamics of foreign-currency denominated loans, which accounted for 52.3 percent of total non-government credit in January 2006 versus about 60 percent in the similar period of 2005.
The comprehensive set of measures aimed at tightening monetary conditions which was adopted by the NBR in February 2006 has led to an increase in the effective sterilization rate (to marginally above 8 percent from 6.72 percent in January 2006). Banks' deposit rates for non-bank customers have picked up slightly while lending rates have slipped further against the background of heightened bank competition for market shares.
In this context, the NBR Board believes that, at least in the short run, persistent domestic demand pressures as well as potential supply-side shocks (administered price adjustments and changes in excise duties regime) call for a more restrictive monetary policy stance.
The adequate control of liquidity via open-market operations will trigger a rise in the effective sterilization rate towards 8.5 percent. Meanwhile, the increase in the minimum reserve requirements on foreign exchange-denominated liabilities of credit institutions to 40 percent from 35 percent (starting with the March 24 - April 23, 2006 maintenance period) will make its effect manifest in the upcoming period. In this context, the monetary policy stance is set to tighten further.
In light of the available data, the NBR Board has decided to maintain the monetary policy rate at 8.5 percent per annum and to continue to significantly sterilize excess liquidity via open-market operations.
The NBR Board reaffirms its readiness to use the entire available array of instruments to counter inflationary pressures and maintain disinflation on the projected trajectory, counting also on the support of other components of the macroeconomic policy mix.
According to the announced calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for May 11, 2006, when a new quarterly Inflation Report is to be analyzed.