Bancherul - BANCI / ENGLISH / Romanian central bank: conditions remains adequate for fulfilling the medium-term inflation target

In its meeting of May 3, 2011, the Board of the National Bank of Romania decided the following, said the bank in a press release:

- to keep unchanged the monetary policy rate at 6.25 percent per annum;

- 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 May 5, 2011.

The recent developments in macroeconomic indicators shows an increase in the annual inflation rate to 8.01 percent in March 2011 from 7.6 percent in the previous month as supply-side risks related to the significant hikes in food and fuel prices presented in the February 2011 Inflation Report have materialized in the context of heightening pressures on the international commodities market.

Industrial output and exports stayed on an upward trend, but the annual real dynamics of indicators relevant to domestic demand and that of credit to the private sector remained in negative territory. The aggregate demand deficit will persist in the medium term although it is expected to narrow gradualy.

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 envisages a temporary increase in the annual inflation rate in 2011 Q2 following the shocks induced by the factors outside the direct influence of the aggregate demand management ensured via central bank’s tools, especially those generated – similarly to most emerging economies – by the evolution of global food and fuel prices.

Nevertheless, the baseline scenario of the current projection envisages the resumption of disinflation in 2011 H2, once the first-round effect of the VAT rate hike faded, followed by the return and maintenance of inflation rate inside the variation band around the central target throughout 2012.

Moreover, the current forecast highlights the persistence of risks and uncertainties related to the calendar and magnitude of administered price adjustments, but also to global market developments.
In this context, the NBR Board decided to leave unchanged the monetary policy rate at an annual 6.25 percent, 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 monetary policy stance is aimed at preserving the prospects for resuming disinflation despite the recent inflationary shocks, with broad monetary conditions remaining adequate for fulfilling the medium-term inflation target. At the same time, the improvement in non-resident financial investor sentiment towards the Romanian economy led to an increase in volatile capital inflows, entailing a moderate nominal appreciation of the leu versus the euro. The outlook of a continued and growing flows of volatile capital burden/trigger constraints on the dosage of the monetary policy instruments.

These decisions, along with the consistent implementation of commitments agreed by the Romanian authorities under the new financing agreements with international institutions, would ensure the preservation of prospects of a sustainable resumption of disinflation and a robust recovery of the Romanian economy during the nominal and real convergence process.

The NBR reiterates that the central bank will vigilantly 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 May 5, 2011. According to the calendar of NBR Board meetings dedicated to monetary policy issues, the next meeting is scheduled for June 29, 2011.