Romania's central bank left is benchmark monetary policy rate steady at 1.75 percent but cut its reserve requirement on foreign-exchange liabilities by 200 basis points to 12 percent in light of "slower forex loan dynamics and in order to continue the harmonization of the reserve requirements mechanism with the standards and practices of the European Central Bank and the major central banks across the European Union."
The National Bank of Romania (NBR), which cut its rate by 350 basis points in 2015, added that the reserve requirements ratio (RRR) on leu-denominated liabilities remains at 8 percent.
The second part of Romania's two-step cut in Value Added Taxes took effect on Jan. 1, 2016 and this will push the inflation rate deeper into negative territory so it will first return to positive territory after the effects of the June 2015 VAT cut have faded, amid an easier fiscal policy stance and higher labour costs, the central bank said.
Romania cuts its VAT rate to 20 percent from 24 percent as of Jan. 1.
In its November inflation report, the NBR forecast that headline inflation would hit minus 0.7 percent at the end of 2015 and remain in negative territory until May 2016 before it turns positive and reaches 1.1 percent by the end of 2016 and then remains within the central banks variation band of 1.5 to 3.5 percent until the end of its forecast horizon.
Excluding the effects of the first round VAT cut in 2015, the central bank forecast headline inflation of 2.1 percent end-2015 and 2.7 percent end-2016.
At its next meeting on Feb. 5, the board of the central bank will examine a new inflation report.
Romania's consumer price inflation rate was minus 1.1 percent in November, the sixth consecutive month of deflation since June, but excluding the impact of the VAT cut, inflation would have been close to 2 percent, i.e. within the NBR's target range.
Romania's economic growth picked up speed in the third quarter of 2015 due to rising private consumption on the back of higher household income, a recovery in lending, lower indirect taxes and stronger confidence in the economy, the NBR said.
Romania's Gross Domestic Product rose by 1.4 percent in the third quarter from the second quarter for annual growth of 3.6 percent, up from 3.4 percent the second quarter. Excluding the agricultural sector, which was affected by a poor harvest, GDP hit a post-crises high of more than 5 percent.
The central bank currently sees the negative output gap closing during this year, implying more inflationary pressures as demand gradually builds up.
Strong growth, foreign exchange reserves of 32 billion euros at the end of 2015 and a current account deficit of less than 1 percent of GDP helped stabilize the leu's exchange rate despite swings in global risk aversion, geopolitical tensions and a diverging monetary policy stance among the world's major central banks, the NBR said.
The leu was quoted at 4.52 to the euro at the end of 2015, down only 0.9 percent on the year.
The National Bank of Romania issued the following statement: