NBR lowers monetary policy rate to 8.0 percent

In its meeting of February 9, 2007 the Board of the National Bank of Romania has decided the following: to lower the monetary policy rate to 8.0 percent per annum from 8.75 percent; to pursue an adequate control of liquidity via open-market operations in line with financial market conditions; to leave unchanged the minimum reserve requirement ratios.

The NBR Board has examined and approved the quarterly Inflation Report, which will be released to the public in a press conference scheduled for February 15, 2007, along with a 12-month calendar of NBR Board meetings dedicated to monetary policy issues.

The NBR Board analyzed the developments in the main macroeconomic indicators, in both domestic and international financial markets as well as their prospects in the context of Romania's integration in the European Union.

Statistical data confirms the continuation of disinflation and the attainment of NBR's 2006 objective - with year-on-year inflation falling to 4.87 percent in December, below the 5.0 percent target. This achievement was the result of restrictive monetary and fiscal policies, combined with volatile food price deflation, a slowdown in the administered price dynamics and the appreciation of the leu.

The most recent developments in macroeconomic indicators show the persistence of high dynamics of economic growth and productivity underpinned by investment and consumption expansion, the latter also triggering a widening of the current account deficit.

Meanwhile, the increase in real monetary policy rate spread and the faster-than-anticipated appreciation of the leu, including as a result of stronger capital inflows amid favorable investor sentiment regarding emerging markets as well as in the context of Romania becoming an EU Member State,  have led to tighter overall monetary conditions.

Developments in foreign exchange and money markets over the recent months have highlighted liquidity and interest rate levels triggering a faster appreciation of the domestic currency, which contributes significantly to a slowdown in aggregate price growth. Money market rates have constantly been below the monetary policy rate so far, which calls for the adoption of measures to enhance the signaling role of the latter. 

Against this background, the NBR Board has decided to adjust its broad monetary conditions to the new context by lowering the monetary policy rate to 8.0 percent per annum from 8.75 percent, by pursuing an adequate control of liquidity via open-market operations in line with financial market conditions and by leaving unchanged the minimum reserve requirement ratios. Such a resetting of the level of monetary policy instruments is consistent with the aim to attain medium-term inflation targets in a sustainable manner and the need to ensure financial stability. 
   
The NBR Board has examined and approved the quarterly Inflation Report, which assesses the recent macroeconomic context and inflation outlook, as well as the main challenges and risks to monetary policy in the coming period. Even though the baseline scenario of the current projection shows a relative improvement of the medium-term inflation outlook, the risks associated with an increase in wages not being supported by sufficient progress in productivity and a possible easing of fiscal policy require the maintenance of a prudent monetary policy stance.

The NBR Board will continue to vigilantly monitor monetary and macroeconomic developments, standing ready to adjust its instrument settings in order to ensure the maintenance of disinflation on the projected trajectory and consolidate European Union convergence, relying also on the support from other components of the macroeconomic policy mix.

The new quarterly Inflation Report will be released to the public in a press conference scheduled for February 15, 2007, along with a 12-month calendar of NBR Board meetings dedicated to monetary policy issues.