The Board of the National Bank of Romania has decided to reduce, starting with September 22, 2005, the following interest rates:
- the monetary policy rate to an annual 7.5 percent from 8.5 percent
- the interest rate on its deposit facility to an annual 1.0 percent from 4.0 percent
- the interest rate on its lending facility (Lombard rate) to an annual 14 percent from 20 percent
- the penalty rate for deficits of leu-denominated minimum reserves to an annual 21 percent from 30 percent
Also, according to current regulations, the Board has decided to reduce the interest rate paid for leu-denominated minimum reserves to an annual 1.5 percent from 2.0 percent, starting with the September 24-October 23, 2005 maintenance period.
The NBR Board reaffirms the aim to maintain a prudent monetary policy stance in the coming period.
In its meeting on September 21, 2005, the NBR Board analyzed the latest developments and prospects in macroeconomic indicators, domestic and international financial markets, in the context of the capital account liberalization measures adopted in the first half of the year.
The latest data reveal slower economic growth for the second quarter, with gross domestic product expansion below forecast as a result of lower gross value added in the agriculture sector following a significant contraction of self-consumption, as well as a sharper downward trend of industrial output.
Household purchases of goods and services, especially from imports, have continued to grow at a fast rate, supported mainly by the rise in incomes and readily available financing via banks and non-banking institutions. Also, internal demand expansion has continued to outpace domestic output, leading to a wider external deficit.
Developments in monetary indicators highlight that the expansion of foreign currency credits continues to outpace the rise in leu-denominated loans. This unfavorable trend has triggered the approval of a set of prudential measures aimed at: improving the structure of non-government lending; reducing the gap between the domestic currency/foreign currency structure of non-government lending and that of savings; alleviating financial stability risks.
Measures aimed at slowing down foreign currency lending combined with an adequate control of liquidity will allow NBR to pursue a proper management of aggregate demand, thus consolidating the new monetary policy framework.
The leu has seen an appreciation versus the euro against the background of significant capital inflows attracted by investors' favorable perception of Romanian financial market conditions and also as a result of nominal and real convergence linked to European Union accession.
In August 2005 inflation hit its lowest monthly level in 15 years (0.1 percent), being in line with forecasts released when the NBR officially shifted to a direct inflation targeting strategy and with expectations of continued disinflation.
In this context, the NBR Board has decided to reduce the monetary policy rate to an annual 7.5 percent and to adjust accordingly the interest rates on NBR's standing facilities (the deposit facility and the lending facility), which set a corridor for domestic money market and financial market leu interest rates.
The consolidation of a market for domestic currency denominated financial products, including medium and long term ones, is essential for both the effectiveness of the inflation targeting strategy and the successful future adoption of the euro, according to the Maastricht criteria.
The new monetary policy rate is consistent with the need to calibrate the monetary policy in order to achieve inflation targets in the medium term and to avoid the risk of increased inflows of volatile capital.
The next NBR Board meeting dedicated to monetary policy issues is scheduled according to the announced calendar on November 9, 2005, when a new quarterly Inflation Report is to be analyzed.