Bancherul - BANCI / ENGLISH / National Bank of Romania keeps the monetary policy rate at 5.25 percent

In its meeting of June 27, 2012, the Board of the National Bank of Romania decided the following:

To maintain the monetary policy rate at 5.25 percent per annum;
To ensure the 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 will continue to closely monitor domestic and global economic developments so as, by accordingly adjusting its available instruments, to ensure the fulfilment of its objectives of achieving price stability in the medium term, as well as financial stability.

The annual inflation rate continued to slide, reaching a record low of 1.79 percent in May 2012 from 2.4 percent in March 2012 and 3.14 percent in December 2011. This level, as well as the 3.2 percent projection for end-2012, is in line with the general coordinates of inflation in the euro area. At the same time, annual adjusted CORE 2 (1) inflation hovered around 2.0 percent, while the average growth rate of aggregate prices in the last 12 months was 3.5 percent in May 2012 versus 4.5 percent in March 2012 and 5.8 percent in December 2011. The analysis of macroeconomic indicators suggests the persistence of aggregate demand deficit amid the modest growth of investments and private consumption.

The external environment was marked by tensions and volatility, amid the adverse reaction of financial markets to the escalating sovereign debt crisis, the deepening of problems faced by the European banking system and the lingering uncertainties related to the world economic growth outlook. The increased global risk aversion and worsened investor sentiment against the background of a potential adverse impact of the adjustments in the European banking system and the contagion effect via volatile capital flows had a significant influence on the economies in Central and Eastern Europe, as well as on the exchange rates of the currencies in the region, the leu included.

On the domestic money market the asymmetry of liquidity distribution was alleviated following the adoption of measures to smooth interbank flows, such as expanding the list of eligible assets accepted as collateral for open market operations. The persistent uncertainties, especially as regards the financing possibilities of Romanian foreign-owned credit institutions from their parent banks, generate further tensions in the functioning of the interbank money market and increasing resort to the NBR’s refinancing operations.

The monetary analysis underlines, however, a moderate upward trend of credit to the private sector, faster in the case of loans to non-financial corporations, as well as a gradual reduction of lending rates on new business to this sector, along with some changes in lending standards. These developments reflect the transmission, with a certain lag, of the previous months’ monetary policy signals, a process that might continue in the case of lending rates for the private sector, where there is still room for further adjustments.

The current assessment shows the annual inflation rate remaining inside the variation band around the central target throughout the forecast horizon, although reverting to higher readings than the recent historical lows on account of the unfavourable statistical base effect anticipated to become temporarily manifest in the latter half of 2012. Consequently, in the period ahead, it is of utmost importance to permanently adjust broad monetary conditions to the domestic and international macroeconomic context in a bid to consolidate the prospects of maintaining the annual inflation rate within the variation band around the medium-term targets.

The uncertain external environment may lead to an abrupt heightening of risks associated with increased capital flow and exchange rate volatility, which, coupled with domestic developments related to the electoral context, calls for a further prudent monetary policy stance in order to efficiently anchor expectations and ensure both price and financial stability.

Therefore, the NBR Board has decided to keep unchanged the monetary policy rate at 5.25 percent per annum, to ensure the adequate management of liquidity in the banking system and to maintain the existing levels of minimum reserve requirement ratios on both leu-denominated and foreign currency-denominated liabilities of credit institutions.

The NBR is restating that the implementation of a balanced macroeconomic policy mix amid the fulfilment of commitments under the external financial arrangements with the European Union, the IMF and other financial institutions is essential to achieving price stability in the medium term as well as consolidating financial stability, both being prerequisites for lasting and sustainable economic growth.

The NBR Board reaffirms that it will continue to closely monitor domestic and global economic developments so as, by accordingly adjusting its available instruments, to ensure the fulfilment of the central bank’s objectives.

In line with the announced calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for August 2, 2012, when the new quarterly Inflation Report is to be examined.

(1) Calculated by the NBR by excluding administered prices, volatile prices, and tobacco and alcohol prices from the consumer price index.