In its meeting of 5 February 2016, 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 adequate liquidity management in the banking system; and

- to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The NBR Board examined and approved the February 2016 Inflation Report, which will be presented to the public in a press conference scheduled for 9 February 2016.

Inflation remained in negative territory at the end of 2015, in line with the projection. Behind this stood mainly the broadening of the scope of the reduced VAT rate to all food items, non-alcoholic beverages and food service activities starting June 2015.

The annual inflation rate touched -0.9 percent in December 2015, compared with -1.1 percent in November and the record low of -1.87 percent seen last August. The rise was attributed to the base effects stemming from fuel price movements, faster pick-up in tobacco product prices, as well as the influences of the swifter narrowing of negative output gap and the relative weakening of the local currency.

In the absence of the measure on broadening the scope of the reduced VAT rate, the annual inflation rate would have neared 2 percent at year-end, standing inside the ±1 percentage point variation band of the 2.5 percent target.

GDP growth gathered momentum in 2015 Q3. The fastest annual rates of increase saw the tertiary and construction sectors (more than 5.5 percent), in contrast to the still modest dynamics in the industrial sector and sharp decline in the agricultural sector. A differential between pay rises and labour productivity gains is manifest in the industrial sector.

As for demand, the largest contribution to GDP advance made further final consumption, to which added, this time around, a favourable performance of net exports. In this context, the current account deficit remained below 1 percent of GDP over the first three quarters of 2015, with the wider trade gap being largely offset by an upward path in the services surplus.

Interbank rates on the money market and bank rates continued to decrease to new historical lows. Against this background, the annual dynamics of credit to the private sector advanced further into positive territory, due to leu-denominated loans alone. Loans in domestic currency accounted for 50.7 percent of the loan stock at end-2015, compared with a 35.6 percent low in May 2012, benefitting the functioning of the monetary policy transmission mechanism and helping mitigate the risks to financial stability.

The NBR Board has examined and approved the February 2016 Inflation Report. The new quarterly forecast reconfirms the outlook for inflation to go deeper into negative territory January through May 2016, as a result of the cut in the standard VAT rate and in other indirect taxes. At the same time, the forecast points to the annual inflation rate re-entering the variation band of the target at the beginning of 2017 and remaining there afterwards. This is attributable to the fading out of the transitory disinflationary impact of the standard VAT rate cut, to the easing of the fiscal policy stance and to the rise in unit wage costs. The successive indirect tax cuts in the period from 2015 to 2017 cause the volatility of inflation rate over the projection interval.

The risks to the current projection stem primarily from the domestic environment. They are triggered by the uncertainty about the fiscal and income policies, as well as about the implementation of structural reforms, in the context of the elections scheduled to take place this year and in the absence of agreements with international financial institutions.

On the external front, particularly relevant is the heightened uncertainty surrounding global economic growth, stemming from the performance of the Chinese economy and of other major emerging economies, with implications on euro area recovery. Adding to this is the uncertainty about developments in international oil prices and the recent spike in global financial market volatility, associated with the increasingly diverging monetary policy stances of the world’s major central banks.

Under the circumstances, 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 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 conducive to achieving sustainable economic growth and preserving macroeconomic stability.

The NBR Board considers that a balanced economic policy mix and the progress in structural reform implementation are pivotal to preserving macrostability, ensuring lasting economic growth, carrying on convergence with the European Union, as well as enhancing the resilience of the Romanian economy to potential shocks or adverse conditions worldwide.

The NBR is closely monitoring both domestic and external economic developments for an adequate use and dosage of all its available tools to fulfil the overriding objective regarding medium-term price stability and preserve financial stability.

The new Inflation Report will be presented to the public in a press conference on 9 February 2016. In line with the calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for 31 March 2016.