Romania's central bank left its monetary policy rate at 1.75 percent but said it was ready to use all its available tools during this period of heightened uncertainty and volatility on global financial markets following the U.K.'s referendum on the European Union (EU).
The National Bank of Romania (NBR), which has maintained its rate since May 2015, said recent volatility in markets affected the leu's exchange rate less than those of its regional peers as its international reserves remain adequate and the external position is sustainable, helping ensure that the country's economy is resilient to adverse external shocks.
The leu, which fell from July 2014 to March 2015, fell by 4.6 percent to 4.15 to the U.S. dollar on news that the UK had voted to leave the EU. But since then, the leu has gradually firmed and was trading at 4.07 to the dollar today, up almost 2 percent since the start of this year.
"The most recent macroeconomic developments show the annual inflation rate remaining in negative territory, along with economic growth picking up, solely on the back of stronger domestic demand," the NBR said.
Romania's inflation rate fell further to minus 3.5 percent in May from minus 3.3 percent in April, but this was in line with the central bank's expectations and follows a cut in Value Added Tax (VAT) rates to 20 percent from 24 percent and the drop in global food and energy prices.
The NBR expects inflation to remain in negative territory in the short term though it should gradually rise as the impact of the reduced VAT rate fades out.
However, the central bank added that the prospects for inflation to gradually return to positive territory is surrounded by domestic and external risks amid the heightened uncertainty.
In May the central bank cut its forecast for inflation this year to finish at 0.6 percent from a previous estimate of 1.4 percent. By the end of 2017 inflation is seen at 2.7 percent, down from 3.4 percent, but within the central bank's target range of 1.5 to 3.5 percent.
At its next meeting in August, the bank's board will update its inflation forecast.
Economic growth in Romania gathered momentum in the first quarter of this year as annual growth rose to 4.3 percent from 3.8 percent in the previous quarter, boosted by fiscal stimulus and higher household income that spurred consumption and imports.
The National Bank of Romania issued the following statement: