Romania: Central Bank leaves policy rate on hold amid higher uncertainty and lower inflation expectations
August 4, 2016
In its policy meeting on 4 August, the National Bank of Romania (NBR) met market expectations in deciding to keep the monetary policy rate unchanged at 1.75%, where it has been since May 2015. In addition, the Bank decided to maintain the minimum reserve requirement ratio on leu-denominated liabilities of credit institutions at 8.00% and the reserve requirement on foreign-currency-denominated liabilities at 12.00%.
In its accompanying statement, the NBR pointed out that the Romanian economy grew at a solid pace in Q1. The first quarter reading was buttressed by an accommodative fiscal policy and solid private consumption, which was supported by higher disposable income. Favorable monetary conditions resulted in a surge of leu-denominated loans in the private sector in June and highlights “the improved monetary policy transmission”.
The Bank, however, did point out that heightened international and domestic risks cast a shadow on the country’s outlook. Uncertainty regarding global economic growth and the Eurozone recovery has been amplified in the wake of the UK EU-membership referendum in June, geopolitical tensions and growing concern surrounding the health of European banks. In Romania, the aggressive fiscal policy the government is carrying out ahead of the November Parliamentary elections threatens to debilitate the country’s public accounts. Furthermore, changes to financial legislation can also have an adverse effect.
The NBR revised downward its inflation expectations for 2016 and 2017. Although the decline in annual consumer prices softened from 3.0% in March to 0.7% in June, the Bank said that, “the baseline scenario reveals a projected path of the annual inflation rate that is significantly lower than that previously envisaged.” The Bank believes that developments in the country’s core inflation will be weighed down by persistently-low inflation in the region and across the world. Under the new scenario, consumer prices in annual terms are expected to remain negative for the rest of this year and inflation is not expected to resurface until 2017. That said, the Bank expects inflation to remain below the 2.5% target plus/minus 1.0% at the end of 2017.
Against a backdrop of heightened uncertainty and lower inflation expectations, the NBR decided to keep the rate unchanged in order to, “ensure price stability over the medium term in a manner conducive to achieving sustainable economic growth.”
Economist Nicolaie Alexandru from JPMorgan comments on the latest decision by the Central Bank:
“The inflation forecast was revised sharply lower for the second time this year, and the NBR governor is turning more dovish; there was no mention about the need to tighten monetary conditions in the press briefing today. […] The NBR governor indicated that, given the decline in inflation expectations among other factors, the bank will maintain a pragmatic approach in the period ahead – we read pragmatism as refraining from any actions that would lead to tighter monetary conditions assuming no abrupt changes”.
The Bank is scheduled to meet again on 30 September.