BNR set a realistic inflation rate of 3.5 pc for an uncertain 2010

The Romanian National Bank (BNR) has set an inflation target for 2010 at 3.5 pc, with one percentage point variation interval, similar to that set for 2009, confirming the work hypothesis used by the central bank ever since February 2009.

BNR Governor Mugur Isarescu stated yesterday at the presentation of the inflation target quarterly report that such target was established in cooperation with the International Monetary Fund (IMF), as a "realistic and feasible inflation target in an economic context with many uncertainties." The Romanian National Bank (BNR) has reviewed as decreasing the inflation forecast for this year and for 2010, from 4.5 pc to 4.4 pc and from 3.5 to 2.8 pc, respectively, as compared to the report of February.

In the first quarter, the inflation slowed down a bit, even if an inflation boost was recorded during the first part of this quarter.

"Disinflation will be felt on a period of several quarters (...). In Romania, in the next period of time, there will not be pressures coming from demand on the market in terms of inflation", BNR Governor also stated. He pointed out that the uncertainty interval broadened even more, as compared to the previous forecasts, however with a higher risk of reaching the lowest level of the targeted interval.

Reduction of monetary policy interest was necessary

Fiscal and salary policies have made big strides in stabilizing macroeconomic imbalances, being pro-cyclic in the context of the economic crisis, therefore the monetary policy, in its turn, could not have remained pro-cyclic, the central bank official emphasized, after the Executive Board of BNR decided to cut down on the monetary policy interest by 0.5 pc, to 9.5 pc per year, and maintain the mandatory minimum reserves rates applicable for RON and foreign currency liabilities to 18 pc and 40 pc, respectively. Banks will first of all reduce the deposit interest rates and only afterwards the loan interest rates, further to the Romanian National Bank's decision to reduce monetary policy interest, as Adrian Vasilescu, Councilor of BNR Governor declared on Thursday. Furthermore, Isarescu rejected the idea of some analysts that the monetary policy interest reduction by 0.5 pc is aggressive.

Stagflation and high external deficit, a bad match

BNR Governor said that stagflation - economic decrease associated with inflation - as combined with a high external deficit is one of the "worse situations that can ever occur". He explained that the decision of reducing the monetary policy interest from 9.5 pc was based, among other arguments, on the inflation decelerating trend, a strengthening being expected during 2010, associated with the disinflation effect triggered by the aggregated demand contraction.

"That does not necessarily prove that we are concerned with the economic growth, but with maintaining a balance," Isarescu said. According to AdrianVasilescu, councilor of the central bank's head, he relies on the Gross Domestic Product growth even this year, despite its negative trend that the economy will record in the first year-half.

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