In its meeting of 4 November 2014, the Board of the National Bank of Romania decided:

- to lower the monetary policy rate to 2.75 percent per annum from 3.00 percent starting with 5 November 2014;

- to pursue adequate liquidity management in the banking system;

- and to cut the minimum reserve requirements ratio on foreign currency-denominated liabilities of credit institutions to 14 percent from 16 percent starting with 24 November – 23 December 2014 maintenance period and to maintain the minimum reserve requirements ratio on leu-denominated liabilities at 10 percent.

With a view to mitigating interbank money market rate volatility and to consolidating the transmission of the policy rate signal, the NBR Board decided to narrow the symmetrical corridor of interest rates on NBR’s standing facilities around the policy rate to ±2.50 percentage points from ±2.75 percentage points. Thus, starting 5 November 2014, the interest rate on the NBR’s lending facility (Lombard) will be lowered to an annual 5.25 percent from 5.75 percent, while its deposit facility rate will remain at 0.25 percent per annum.

The NBR Board has examined and approved the quarterly Inflation Report, which will be released to the public in a press conference on 6 November 2014.

Statistical data show the annual inflation rate remaining at low levels after the fading of the impact arising from the cut in the VAT rate for some bakery products. The 12-month inflation rate followed a path lower than previously forecasted and ran close to the lower bound of the variation band of the target, mainly due to subdued developments in volatile food prices, low euro area inflation, as well as to the persistence of the negative output gap and the downward adjustment in inflation expectations.

The annual inflation rate stood at 1.54 percent in September 2014, up from 0.84 percent a month earlier, amid the fading of the statistical effect of the 2013 VAT rate cut on milling and bakery products. At the same time, the average annual inflation rate remained unchanged at 1.2 percent in September, while the average annual inflation rate based on the Harmonised Index of Consumer Prices – which is relevant for assessing convergence with the European Union – came in at 1.3 percent, the same as in August.

Looking at the real economy, the latest data point to a relative deceleration in the annual dynamics of industrial output, given that domestic demand further saw weak recovery, owing particularly to investment developments, and exports witnessed a slacker uptrend.

The growth rate of domestic currency loans further posted positive readings, thanks to the pass-through of the successive policy rate cuts onto lending rates on new business to companies and households. However, the real annual dynamics of credit to the private sector remained in negative territory, against the background of the sharper contraction in foreign currency credit (stocks) and the ongoing operations to remove non-performing loans from credit institutions’ balance sheets.

In today’s meeting, the NBR Board has examined and approved the quarterly Inflation Report. Compared to the August forecast, the new projection shows a markedly lower expected inflation path. Thus, the annual inflation rate is seen coming in at 1.5 percent at end-2014 and at 2.2 percent at end-2015. The downward shift of the inflation trajectory stems primarily from the persistence of the negative output gap, the consolidation of inflation expectations at lower levels, as well as from the influence of subdued inflation and the weak economic recovery in the euro area and other European countries.

The risks associated with the new projection further relate chiefly to the considerable uncertainty surrounding external developments, in particular capital flow volatility amid fluctuations in foreign investors’ risk aversion in the context of monetary policy stance adjustments by major central banks worldwide, the ongoing cross-border deleveraging, and of the geopolitical tensions.

Against this backdrop, the Board of the National Bank of Romania has decided to lower the monetary policy rate to 2.75 percent per annum from 3.0 percent starting 5 November 2014 and to continue to pursue adequate liquidity management in the banking system.

Moreover, with a view to mitigating interbank money market rate volatility and consolidating the transmission of the policy rate signal, the NBR Board has decided to narrow the symmetrical corridor of interest rates on the NBR’s standing facilities around the policy rate to ±2.50 percentage points from ±2.75 percentage points. Thus, starting 5 November 2014, the interest rate on the NBR’s lending facility (Lombard) will be lowered to an annual 5.25 percent from 5.75 percent, while its deposit facility rate will remain at 0.25 percent per annum.

At the same time, in order to continue the harmonisation of the reserve requirements mechanism with the standards and practices in the field pursued by the European Central Bank and the major central banks of EU Member States, the NBR Board has decided to cut the minimum reserve requirements ratio on foreign currency-denominated liabilities of credit institutions to 14 percent from 16 percent starting with the 24 November-23 December 2014 maintenance period. The minimum reserve requirements ratio on leu-denominated liabilities will remain unchanged at 10 percent.

These decisions are meant to ensure price stability over the medium term in line with the 2.5 percent ±1 percentage point flat target, along with the sustainable recovery of lending, which is likely to help achieve balanced and lasting economic growth.

The NBR Board reiterates that the consistent implementation of an adequate macroeconomic policy mix, along the lines of the external financing arrangements, and the resumption, by observing prudential rules, of financial intermediation in parallel with an appropriate remuneration of bank deposits are pivotal to consolidating economic growth and enhancing the resilience of the Romanian economy to external shocks.

The NBR is restating that the adequate use and dosage of all its available tools, amid a 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.

The new quarterly Inflation Report will be presented to the public in a press conference on 6 November 2014. According to the approved calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for 7 January 2015.