Press Release of the Board of the National Bank of Romania (31.03.2015)

Press Release of the Board of the National Bank of Romania

31.03.2015

In its meeting of 31 March 2015, the Board of the National Bank of Romania decided:

– to lower the monetary policy rate to 2.00 percent per annum from 2.25 percent starting with 1 April 2015;

– to narrow the symmetrical corridor of interest rates on the NBR’s standing facilities around the policy rate to ±1.75 percentage points from ±2.00 percentage points. Thus, starting 1 April 2015, the interest rate on the NBR’s lending facility (Lombard) is lowered to an annual 3.75 percent from 4.25 percent, while the deposit facility rate remains at 0.25 percent per annum;

– to pursue adequate liquidity management in the banking system; and

– to leave unchanged the current levels of minimum reserve requirements ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The analysis of the latest data points to the annual inflation rate staying below the lower bound of the variation band of the flat target, alongside emerging signals of a halt in the significant decline seen previously. This occurs amid a relatively slower year-on-year fall in fuel prices and volatile food prices, as well as the persistence of a negative output gap and euro area deflation.

In February 2015, the annual inflation rate and the average annual inflation rate stayed unchanged versus the previous month at 0.4 percent and 1.0 percent respectively. The average annual inflation rate based on the Harmonised Index of Consumer Prices, which is relevant for assessing convergence with the European Union, dropped to 1.2 percent, from 1.3 percent in the prior month.

As for the economic activity, national accounts data for the final quarter of 2014 point to real GDP advancing by 2.6 percent in annual terms, on the back of further rising final consumption and a positive contribution, for the first time in two years, from gross fixed capital formation. Nearly all monthly indicators for the early months of this year, especially those on retail trade and consumer confidence, hint at the consolidation of the economic growth trend in the period ahead.

Domestic currency loans grew at a swifter pace in annual terms, against the background of the ongoing liquidity surplus in the money market and the pass-through of the successive policy rate cuts onto lending rates on new business to companies and households. On the other hand, forex loans contracted at a slightly faster rate year on year, their share in total credit to the private sector narrowing to 56.1 percent in February, down from 56.4 percent a month earlier. The real annual dynamics of credit to the private sector remained however in negative territory, reducing further the level of financial intermediation.

Looking ahead, evidence so far suggests the annual inflation rate embarking on a slight uptrend, still below the lower bound of the variation band of the flat target, reflecting in particular the combined effect of developments in volatile prices and of the narrowing, yet still significant negative output gap. The uncertainty surrounding this outlook arises from both the external environment – mostly from the geopolitical tensions in the region, the situation in Greece and the euro area, and from the growing divergence between the monetary policy stances pursued by major central banks worldwide – and the domestic environment.

Against this background, the Board of the National Bank of Romania decided to lower the monetary policy rate to 2.00 percent per annum from 2.25 percent starting 1 April 2015 and to continue to pursue adequate liquidity management in the banking system.

With a view to containing interbank money market rate volatility and strengthening the transmission of the policy rate signal, the NBR Board moved to narrow the symmetrical corridor of interest rates on the NBR’s standing facilities around the policy rate to ±1.75 percentage points from ±2.00 percentage points. Accordingly, starting 1 April 2015, the interest rate on the deposit facility remains at 0.25 percent per annum and that on the NBR’s lending facility (Lombard) is lowered to an annual 3.75 percent.

The NBR Board also decided to keep unchanged the current levels of minimum reserve requirement ratios on liabilities of credit institutions. These levels will be adjusted, in compliance with the long-term programme for bringing them into line with European levels, when domestic and external conditions allow it.

Based on currently available data, the decisions are meant to ensure price stability over the medium term, in line with the 2.5 percent ±1 percentage point flat target, in a manner supportive of economic growth, also by restoring confidence and reinvigorating lending.

The NBR Board reiterates that the consistent implementation of an adequate macroeconomic policy mix and the step-up in structural reforms, together with sustainable financial intermediation and an appropriate remuneration of bank deposits are pivotal to consolidating the Romanian economy and enhancing its resilience to external shocks.

The NBR is restating that the adequate use and dosage of all its available tools, amid close monitoring of domestic and global economic developments, will ensure the achievement of the overriding objective of maintaining price stability over the medium term, along with preserving financial stability.

In line with the approved calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for 6 May 2015, when the new quarterly Inflation Report is to be examined.