The Board of the National Bank of Romania has decided to maintain the level of its policy interest rate at 7.5 percent per annum and to increase the volume of sterilization through open market operations.
The Board of the National Bank of Romania has reaffirmed its decision to conserve the prudent stance of monetary policy with a view to ensuring the sustainability of the programmed pace of disinflation.
In its meeting of November 9, 2005, the Board of the National Bank of Romania analyzed the evolutions in recent months of a broad range of macroeconomic and financial market indicators, as well as their prospects in the context of recently adopted and forthcoming macroeconomic and structural policy measures.
The disinflation process resumed in the third quarter and continued in the first part of the fourth quarter of 2005, with the annual inflation rate dropping in October to its lowest level in 15 years (8.1 percent). Consumer price growth deceleration is, however, still impeded by supply-side factors, especially by the dynamics of world oil prices, as well as by the persistence of pressures exerted by the rapid growth of aggregate demand.
Third quarter statistics show domestic absorption dynamics staying high, comparable in relative terms to figures registered in the previous quarter. The expansion of its principal components during the current period - household consumption and private investment - has been mainly underpinned by the substantial growth of disposable income and the acceleration of private sector indebtedness, the latter stimulated by favorable access conditions to alternative sources of bank and non-bank financing, both domestic and external.
As a consequence of reduced pressures induced by short-term capital inflows, leu appreciation has slowed, the domestic currency exchange rate even registering a change in trajectory from the end of September.
The assessment of current and future economic conditions indicates that the present level of the policy rate is compatible with the medium-term disinflation perspective. In this context, the National Bank of Romania will maintain the prudent stance of monetary policy and will resort to its entire array of instruments, including through increasing the volume of sterilization, in order to counteract increasing inflationary pressures. The persistence of a risk of reappearance of potentially volatile inflows will be counterbalanced by the need to ensure the attainment of the projected disinflation path.
As a consequence, the Board of the National Bank of Romania has decided to maintain its policy interest rate at the level of 7.5 percent per annum and to increase the volume of liquidity sterilized through open market operations (one-month deposit auctions and certificates of deposit issued by the NBR).
At the same time, the Board of the National Bank of Romania has decided to increase the interest rate paid on minimum required reserves in US dollars from 0.80 percent to 0.95 percent per annum, while keeping unchanged the interest rate paid on minimum required reserves in lei and euro.
In the same meeting, the Board approved the Inflation Report no. 2 (November 2005), which provides an assessment of the recent macroeconomic context, presents the inflation perspective in a six-quarter horizon, and identifies the main challenges and constraints on monetary policy in the next period, in the context of inflation targeting. This report will be made public in a press conference scheduled for November 16, 2005.