Board of the National Bank of Romania decided to lower the monetary policy rate to 6.00 percent per annum

In its meeting of November 2, 2011, the Board of the National Bank of Romania decided the following:

• to lower the monetary policy rate to 6.00 percent per annum from 6.25 percent starting with November 3, 2011;
• to ensure 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 Board has examined and approved the quarterly Inflation Report, which will be released to the public in a press conference scheduled for November 7, 2011.

The annual inflation rate dropped to 3.45 percent in September from 4.25 percent in the previous month and re-entered the variation band around the central target after more than 12 months. Moreover, the annual adjusted CORE2 inflation rate also dropped, albeit less significantly, to 2.72 percent in September from 2.92 percent in August 2011.

The reduction in the annual inflation rate was mainly attributed to the fall in volatile food prices over June-September and the fading-out of most of the first-round effect of the VAT rate hike. For the months ahead, disinflation is envisaged to consolidate, along with the downward adjustment of inflation expectations against the background of maintaining a prudent monetary policy stance.

The favourable performance of industrial production and exports continued, despite the recent negative signals coming from the external environment. Nevertheless, the negative output gap is persisting, and the revival of loans to the private sector is still modest, also as a result of banks' pro-cyclical behaviour reflecting uncertainties and risks related to the sovereign debt crisis in the euro zone and the mixed signals on world economy recovery.

The NBR Board has examined and approved the quarterly Inflation Report, a document that assesses the recent macroeconomic context, investigates the inflation outlook and identifies the main challenges and constraints to monetary policy in the period ahead.

The updated projection of macroeconomic developments shows the annual inflation rate remaining inside the variation band around the central targets of 3 percent in both 2011 and 2012.

A significant improvement was recorded by the short-term inflation outlook, in line with NBR expectations regarding the end of the cycle of supply-side shock effects following the VAT rate hike that affected the economy and the favourable impact of the domestic agricultural production. However, the balance of medium-term risks is still asymmetric, as they relate to external developments, investors' risk aversion and capital flow volatility, as well as the fiscal policy stance and administered price adjustments.

In view of these overall prospects, the NBR Board has decided to lower the monetary policy rate to 6.00 percent per annum from 6.25 percent. As a result, starting 3 November 2011, the rate on the deposit facility will be cut to 2.00 percent per annum from 2.25 percent and the rate on the lending facility (Lombard) will be 10.00 percent per annum versus 10.25 percent.

The NBR Board has also decided to continue to pursue an adequate management of liquidity in the banking system and to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The judicious adjustment of the central bank's stance is aimed at steadily ensuring adequate real broad monetary conditions so as to secure a lasting maintenance of inflation inside the variation band around the targets as well as financial stability - these elements, alongside the implementation of commitments on strengthening fiscal consolidation and structural reforms undertaken by the Romanian authorities under the multilateral external financing arrangements signed with international institutions, are essential for a sustainable recovery of the Romanian economy.

The gradual adjustment of real broad monetary conditions is expected to be reflected in banks' lending rates. At the same time, the NBR Board reiterates the importance of fostering domestic saving, also by an appropriate remuneration of bank deposits in order to ensure a sustainable external deficit and a progressive reduction in relative terms of the degree of dependency of Romania's economy on external financing.

The NBR reaffirms that the central bank will further monitor domestic and global economic developments so as, via an adequate use of its available instruments, to ensure the fulfilment of its objectives of achieving and maintaining price stability in the medium term as well as financial stability.

The quarterly Inflation Report will be released to the public in a press conference scheduled for November 7, 2011. According to the calendar of NBR Board meetings dedicated to monetary policy issues, the next meeting is scheduled for January 5, 2012.