Bancherul - BANCI / ENGLISH / National Bank of Romania: the resumption of disinflation and a restarting sustainable economic growth critically hinges on the firm implementation of fiscal consolidation measures

In its meeting of August 4, 2010, the Board of the National Bank of Romania decided the following:
• to keep unchanged the monetary policy rate at 6.25 percent per annum;
• to ensure an adequate management of liquidity in the banking system;
• to maintain the existing levels of minimum reserve requirement ratios on both leu-denominated and foreign currency-denominated liabilities of credit institutions
The NBR Board has examined and approved the quarterly Inflation Report, which will be released to the public in a press conference scheduled for August 6, 2010.

Although the annual inflation rate fell to 4.38 percent in June from 4.42 percent in May and 5.2 percent in January, and the annual adjusted CORE2 inflation has hovered around two percent in the first half of this year, the increase in value added tax starting July 1, 2010, will trigger a significant but temporary pick-up in consumer price inflation. Thus, projections indicate an annual headline inflation of around 7.8 percent at the end of 2010.

Against the background of the persistence of the negative output gap, a return of headline inflation on a downward path towards the 3 percent target by the end of 2011 is to be expected after the impact of the first- round effect of the VAT hike dissipates.
The resumption of disinflation decisively hinges however on the efforts to offset the possible second-round effects of the VAT increase, along with reducing uncertainties related to the implementation of structural reforms and fiscal consolidation measures.

In this context, the NBR Board has decided to keep unchanged the monetary policy rate at 6.25 percent per annum and to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions. Also, as uncertainties related to the regional financial crisis have diminished and given a relative normalisation of money and foreign exchange markets, the NBR Board decided to ensure an adequate management of liquidity in the banking system.

These decisions are aimed at ensuring appropriate real broad monetary conditions in order to firmly anchor inflation expectations and to maintain the annual headline inflation rate, recalculated by excluding the first-round effect of the VAT rate increase, on a path in line with medium-term inflation targets.

In this context, the NBR Board reaffirms that the resumption of disinflation and a restarting sustainable economic growth critically hinges on the firm implementation of fiscal consolidation measures, structural reforms and on improved absorption of European funds, in line with commitments set under the multilateral external financing arrangement with the European Union, the International Monetary Fund and other international financial institutions.

Against this background, the NBR will vigilantly monitor domestic and global economic developments so as, via an adequate use of its available instruments, to ensure the fulfilment of its objectives of achieving and maintaining price stability in the medium term as well as financial stability.

At the same time, the NBR Board has examined and approved the quarterly Inflation Report, a document that assesses evolutions in the recent macroeconomic environment and the inflation outlook, and identifies the main challenges and risks to monetary policy in the coming period. The report will be released to the public in a press conference on August 6, 2010.

According to the announced calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for September 29, 2010.