The National Bank of Romania (NBR), which has now cut its rate by 350 basis points since embarking on an easing cycle in July 2013, also narrowed the symmetrical corridor of rates on its standing facilities to 1.5 percentage points from 1.75 percentage points.
This means the Lombard lending facility rate is cut to 3.25 percent from 3.75 percent while the deposit rate remains at 0.25 percent.
While the reserve requirement on domestic currency liabilities was cut - a policy in line with the central bank's effort to harmonize its reserve requirement mechanism to that of the euro zone - the minimum reserve requirement on banks' foreign currency liabilities was maintained at 14 percent.
In its latest quarterly inflation report, which will be released on May 8, the NBR forecast that inflation will be around nil between June 2015 and May 2016 before returning to the central bank's tolerance range in the final quarter of next year.
In its previous forecast from February, the central bank expected inflation to embark on a slight uptrend, though still remain below the lower bound. For 2015 the central bank expected inflation of 2.1 percent by the end of this year and to reach 2.4 percent by end-2016.
The main reason for the cut in the central bank's inflation forecast stems from the reduction in the VAT rate to 9 percent from 24 percent for all food items, non-alcoholic beverages and public food services as of June 1.
The NBP targets inflation of 2.5 percent, plus/minus one percentage point. Consumer price rose by 0.8 percent in March from an inflation rate of 0.4 percent in February.
The National Bank of Romania issued the following statement:
"In its meeting of 6 May 2015, the Board of the National Bank of Romania decided:
- To lower the monetary policy rate to 1.75 percent per annum from 2.00 percent starting with 7 May, 2015;
- To narrow the symmetrical corridor of interest rates on the NBR’s standing facilities around the policy rate to ±1.5 percentage points from ±1.75 percentage points. Thus, starting 7 May, 2015, the interest rate on the NBR’s lending facility (Lombard) is lowered to an annual 3.25 percent from 3.75 percent, while the deposit facility rate remains at 0.25 percent per annum;
- To pursue an adequate liquidity management in the banking system;
- To cut the minimum reserve requirements ratio on leu-denominated liabilities of credit institutions to 8 percent from 10 percent and to keep unchanged the minimum reserve requirements ratio on their foreign exchange-denominated liabilities at 14 percent starting with 24 May – 23 June 2015 maintenance period.
The NBR Board has examined and approved the quarterly Inflation Report, which will be released to the public in a press conference on 8 May 2015.
The latest statistical data point to the annual inflation rate remaining below the lower bound of the variation band of the target, amid the further slow annual dynamics of volatile prices and subdued euro area inflation, the persistence of a negative output gap, further low prices on international markets, and the consolidation of inflation expectations within a lower range.
In March 2015, the annual inflation rate ran at 0.8 percent, a level similar to that in December 2014. The average annual inflation rate dropped to 0.9 percent in March 2015 and the average annual inflation rate based on the Harmonised Index of Consumer Prices, which is relevant for assessing convergence with the European Union, slipped to 1.2 percent, from 1.4 percent in December 2014.
Domestic currency loans saw their upward path strengthening, also as a result of the steps taken to ease monetary policy: successive rate cuts, narrowing of the symmetrical corridor of interest rates on the NBR’s standing facilities around the policy rate, and a gradual reduction in minimum reserve requirements ratios. Lending rates on new business fell to historical lows as far as households and non-financial corporations are concerned. The stock of forex loans kept decreasing, against the backdrop of stepped-up operations to remove non-performing loans from credit institutions’ balance sheets. The share of leu-denominated loans in total credit to the private sector widened to 45 percent, against 35.6 percent in May 2012, and their staying on an upward trend is likely to push the real annual dynamics of total credit into positive territory.
The Romanian economy expanded by 2.8 percent in 2014, thereby making up for the ground lost after the global financial crisis broke out in 2008. In the final quarter of 2014, real GDP grew by 2.7 percent year on year, with all sectors contributing to this performance. The fast pick-up in consumption and the expected rebound in investment pave the way for a consolidation of economic growth in the period ahead. Foreign trade figures are indicative of the current account deficit possibly remaining at sustainable levels over the medium term.
In today’s meeting, the NBR Board has examined and approved the quarterly Inflation Report. Compared to the February 2015 forecast, the new quarterly projection shows a notably lower path of the expected annual inflation rate. The substantial revision of this path stems mainly from incorporating the measure on lowering the VAT rate to 9 percent, from 24 percent previously, for all food items, non-alcoholic beverages and public food services as of 1 June 2015. Under the impact of the VAT rate reduction concerning the above-mentioned goods and services (making up 32 percent of the CPI basket), the annual inflation rate is expected to come in at around nil between June 2015 and May 2016, before re-entering the variation band of the target in the final quarter of next year.
The major risks associated with the current projection relate to the lingering uncertainty surrounding external developments, generated by the situation in Greece and in the euro area, by regional geopolitical tensions, and by the divergence between the monetary policy stances of major central banks worldwide.
On the domestic front, in view of the need to increase the Romanian economy’s capacity to withstand external shocks, concerns relate to the consistent implementation of the macroeconomic policy mix agreed upon with international institutions and to the speedup of structural reforms. Uncertainties also derive from the effects of the envisaged changes to the fiscal framework, as well as from the influence exerted by the characteristics of the agricultural year and by the calendar of administered price adjustments.
Based on currently available data, the Board of the National Bank of Romania has decided to lower the monetary policy rate to 1.75 percent per annum from 2.00 percent starting 7 May 2015 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 ±1.5 percentage points from ±1.75 percentage points. Thus, starting 7 May 2015, the interest rate on the NBR’s lending facility (Lombard) will be lowered to an annual 3.25 percent, while the deposit facility rate will remain at 0.25 percent per annum.
In order to continue the gradual harmonisation of the reserve requirements mechanism with the European Central Bank standards, the NBR Board has decided to cut the minimum reserve requirements ratio on leu-denominated liabilities of credit institutions to 8 percent from 10 percent starting with the 24 May-23 June 2015 maintenance period.
The prospects for the inflation rate to drop to around nil in the following three to four quarters cause these monetary policy decisions to foster lending in a manner supportive of sustainable economic growth and, at the same time, to keep real deposit rates in positive territory.
The NBR Board reiterates that its decisions aim to ensure price stability over the medium term, while safeguarding financial stability. Furthermore, the NBR Board considers that a balanced macroeconomic policy mix, the step-up in structural reforms, and maintaining the wage-productivity match, together with sustainable financial intermediation and an appropriate remuneration of bank deposits are pivotal to consolidating the Romanian economy as part of the EU convergence process.
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.
The new quarterly Inflation Report will be presented to the public in a press conference on 8 May 2015. In line with the approved calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for 1 July 2015."
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