Romania Monetary Policy May 2016


Romania: Central Bank leaves policy rate unchanged for eighth consecutive meeting

May 5, 2016

In its policy meeting on 5 May, 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 did not change the symmetrical corridor of interest rates on the NBR’s standing facilities around the policy rate, keeping it at plus/minus 1.50%. As a result, the interest rate on the NBR’s lending facility (Lombard) remains at 3.25% and the deposit facility rate remains at 0.25%. 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%.

The Central Bank stated that, “the annual inflation rate went deeper into negative territory in the first quarter months of this year to reach -3.0 percent in March,” as cuts in the Value-added Tax and low commodity prices have exerted downward pressures on prices. Regarding last year’s economic performance, the Bank noted that GDP growth had gained steam due to solid growth in consumption and fixed investment and reached a post-crisis high.

Going forward, the NBR expects that consumer prices will increase in annual terms starting from July 2016. Regarding economic growth, latest data from the first quarter point to a continuous expansion of consumer demand on the back of fiscal easing measures and higher disposable income. The Central Bank, however, mentioned that domestic risks to the economy stem from the, “fiscal and income policies, as well as from the adverse effects of legislative changes in the financial field.” Regarding the external environment, the Bank noted that increased concerns regarding the global economic recovery, the EU-membership referendum in the United Kingdom, divergent global monetary policies, escalating geopolitical tensions as well as financial market volatility have all exacerbated economic risks and uncertainty.

To counter both external and internal risks, the NBR decided to keep the rate unchanged in order to, “ensure price stability over the medium term, which helps achieve sustainable economic growth.” The Bank is scheduled to meet again on 30 June.

Commenting on the Bank’s decision, economist Nicolaie Alexandru from JPMorgan said:

“The bank’s focus is slowly shifting in the direction of maintaining stable market interest rates rather than a tight control of the exchange rate. This does not mean that the NBR will stop monitoring EUR/RON or intervene in the FX market – quite the contrary. However, we believe that the NBR is ready to accept a somewhat weaker RON versus EUR during 2016 in order to maintain low and relatively stable market interest rates. […] Given the delicate external environment, we think the NBR prefers to maintain easy conditions to avoid unjustified FX appreciation.”

FocusEconomics Consensus Forecast panelists expect the policy rate to end 2016 at 1.92%. For 2017, the panel foresees the rate closing the year at 2.64%.

Author: Jean-Philippe Pourcelot, Economist

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Romania Monetary Policy Chart

Romania Monetary Policy May 2016

Note: National Bank of Romania reference rate in %.
Source: National Bank of Romania

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