BNR motivates interest rate rise by unsustainable consumption level

The National Bank of Romania (BNR) on Monday decided to raise the monetary policy interest rate, which it pays on the banks' two-weeks deposits, to 8%, the main reason of worry being the "unsustainable" consumption level, which stimulates inflation.

In its release that notifies the decisions of the Board, the central bank pointed out that would maintain the present level of minimum compulsory reserve rates, 20% of the banks' liabilities in lei and 40% of those in foreign currency. The central bank will also continue the firm management of liquidities in the monetary market through market operations.

"The analysis of the most recent statistical data continue to reveal high dynamics of internal demand due to the expansion of investments, but also to maintaining consumption to an unsustainable level, in the context of an intensification of the growth pace of the credit granted to the private sector, especially of that in foreign currency", the BNR release reads, reminding as main factor of the high demand in the Romanian market the strong increase of the population income, at a pace that exceeds that of the labour productivity.

Or, the gap between the advance in wages and the increase in labour productivity, "besides the pressures on the aggregated price level, also increased the risks of deteriorating external competitiveness", the release reads.

Maintaining the demand at a level that is not counterbalanced by the Romanian offer of goods and services has two main effects that consist in the deterioration of the balance of external payment and the stimulation of inflation, which exceeded by almost 2% the BNR target, after the annual consumption price index reached 6.67% in November. Thus, BNR, which set a 4% target for 2007, plus or minus 1%, saw a miss of its target, for the second time from the adoption of this policy, after 2005.

Beyond the inflationary leap at end-2007, especially caused by the increase in food prices and service tariffs, BNR's decision of Monday is aimed at ensuring the reaching inflation targets for 2008 - 3.8% - and 2009 - 3.5%, both bracketed by an "accepted" variation interval of 1%, in an electoral period.

"The short-term perspectives of inflation worsened in the context of the amplification of macroeconomic risks, particularly those related to the income policy and the increase in budget expenses in the electoral period, as well as the uncertainties related to the investors' attitude towards the emerging markets", the release point out.

Curierul National