National Bank of Romania keeps the monetary policy rate at 1.75 percent

Press Release of the Board of the National Bank of Romania:

In its meeting of 30 September 2015, the Board of the National Bank of Romania decided the following:

– to keep unchanged the monetary policy rate at 1.75 percent per annum;
– to pursue an adequate liquidity management in the banking system;
– to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The latest statistical data reveal a further fall of the annual inflation rate in negative territory, due to lower volatile prices – of fuels and food items –, and a relative slowdown of the economic growth rate, also as a result of poorer performance of the agricultural sector.

The broadening of the scope of the 9 percent VAT rate to all food items and public food services, which since June has impacted the prices of nearly 30 percent of the goods and services included in the consumer basket, led to an annual inflation rate of -1.9 percent in August 2015.

Average annual inflation rate dropped to 0.3 percent in August 2015, while the relevant measure for assessing convergence with the European Union, i.e. the average annual inflation rate based on the Harmonised Index of Consumer Prices, slipped to 0.5 percent, from 0.7 percent in the previous month.

Despite the relative slowdown of the economic growth rate, data illustrate a pick-up in private consumption and investment growth, bolstered by the recovery of lending in local currency, to households in particular, along with a sizeable advance in unit wage costs across the industrial sector.

Monetary indicators confirm the fact that the annual change in non-government credit has re-entered positive territory following the expansion in leu-denominated loans. The composition of private sector loans has further changed in favour of the local currency component, whose share in total credit (49.3 percent, against an all-time low of 35.6 percent in May 2012) nears that of foreign currency loans, thereby contributing to the consolidation of monetary policy transmission and the adequate management of risks to financial stability.

The international environment is still marked by uncertainty, despite the recent alleviation of global tensions, given that world economic growth remains fragile and volatility on external financial markets may increase amid the divergence between the monetary policy stances of major central banks worldwide.

On the domestic front, the macroeconomic policy mix is conditional on the manner in which the recently approved or announced fiscal and budgetary measures (the new Tax Code and pay rises) will be transposed into the 2016 budget configuration and execution.

The short-term outlook points to ongoing temporary disinflationary effects of supply-side factors (the impact of the VAT rate cut, developments in fuel prices, etc.). However, these effects might mask the build-up of medium-term inflationary pressures stemming from the still uncertain prospects of the fiscal policy stance and of the match between wage increases and labour productivity gains, as well as from global developments, likely to affect investor perception towards the Romanian economy.

In light of the above and based on currently available data, the Board of the National Bank of Romania has decided to keep unchanged the monetary policy rate at 1.75 percent per annum, to further pursue adequate liquidity management in the banking system, and to maintain the existing levels of the minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The NBR Board decisions aim to ensure price stability over the medium term in a manner supportive of economic growth within a sustainable macroeconomic environment, while safeguarding financial stability. To this end, a balanced monetary and fiscal policy mix and the progress in structural reforms are pivotal to preserving macro-stability, ensuring lasting economic growth, further convergence with the European Union, as well as to enhancing the resilience of the Romanian economy to potential shocks or adverse conditions worldwide.

The NBR monitors both domestic developments and the international economic environment so as – via the adequate use and dosage of all its available tools – to ensure the achievement of the overriding objective of maintaining price stability over the medium term, along with preserving financial stability.

In line with the approved calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for 5 November 2015.