NBR lowers the monetary policy rate to 7.5 percent per annum from 8.0 percent

In its meeting of 26 March 2007, the Board of the National Bank of Romania has decided the following: to lower the monetary policy rate to 7.5 percent per annum from 8.0 percent; to pursue an adequate control of liquidity via open-market operations in line with financial market conditions; to leave unchanged the existing minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The NBR will vigilantly monitor developments in macroeconomic indicators and their outlook in order to ensure that monetary conditions are in line with the achievement of medium-term disinflation objectives and to consolidate the convergence process with the European Union, relying also on the support from other components of the macroeconomic policy mix.

The analysis of recent macroeconomic and monetary developments shows that disinflation has stayed on a trajectory consistent with the announced inflation target for 2007, i.e. 4.0 percent +/-1 percentage point.

According to statistical data, year-on-year inflation rate slowed faster than forecast, to stand at 3.81 percent in February versus 4.01 percent in the previous month, 4.87 percent in December 2006 and 8.49 percent in  February 2006. Average annual inflation rate also fell to 5.8 percent in February from 6.56 percent in December 2006 and 9.0 percent in February 2006. Statistical estimates point to a consolidation of the disinflation process which is to be reflected in a slowdown of the average annual inflation rate to towards 5.0 percent in the coming period.

Economic growth - supported by a solid rise in investment and, to a lesser extent, by an advance in consumption - has retained a fast dynamics of 7.7 percent, while the persistence of excess demand has triggered a wider current account deficit. 

The monetary sector shows a slower dynamic of non-government credit expansion (for the fifth consecutive month) against the background of a slowdown in the pace of increase for leu-denominated credits and some revival in foreign currency lending growth.

The monetary policy stance, assessed via broad monetary conditions, has remained prudent in the context of the previous adjustment in the levels of monetary policy instruments, a faster leu appreciation in the recent period and the removal of some administrative measures limiting non-government credit dynamic.

In light of the available data, the NBR Board has decided to lower the monetary policy rate to 7.5 percent per annum from 8.0 percent and to pursue an adequate control of liquidity via open-market operations in line with financial market conditions.

The cut in the monetary policy rate to 7.5 percent also translates into a narrower gap between its level and the effective rate on sterilization operations, with the aim to improve monetary policy transmission, to enhance the signalling role of the monetary policy rate as the central bank's main monetary policy instrument and to better anchor inflation expectations, including the ones in the longer run.

Although short-term outlook for inflation, including expectations, has improved, the risks posed by a potential relaxation in income and fiscal policies and by a steady widening of the current account deficit require the maintainance of a cautious monetary policy. In this context, the NBR Board has decided to leave unchanged the existing minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The NBR will vigilantly monitor the developments in macroeconomic indicators and their outlook in order to ensure monetary conditions are in line with the achievement of medium-term disinflation objectives and to consolidate the convergence process with the European Union, relying also on the support from other components of the macroeconomic policy mix.
According to the announced calendar, the next NBR Board meeting dedicated to monetary policy is scheduled for 2 May 2007, when a new quarterly Inflation Report is to be examined.