Romania Monetary Policy June 2016


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

June 30, 2016

In its policy meeting on 30 June, 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) remained at 3.25% and the deposit facility rate remained 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 pointed out that GDP had gained momentum the first quarter of this year and reached a post-crisis high. The expansion was supported by buoyant private consumption and an ongoing expansionary fiscal policy. Regarding price developments, the NBR pointed out that, “the annual inflation rate moved in line with expectations, declining to -3.5 percent in May 2016.” The NBR was confident that Romania’s macroeconomic fundamentals are solid enough to withstand adverse external shocks amid heightened international volatility stemming from the outcome of the Brexit referendum of 23 June. According to the Bank, the economy was unscathed from the initial economic fallout as the exchange rate of the leu recorded lower movements compared to its regional peers. In addition, adequate levels of international reserves, a sustainable external position and a stable macroeconomic environment should shield Romania from turbulence in international markets, in the Bank’s view.

Going forward, the NBR expects that inflationary pressures will resurface due to the vanishing base effects from the cut in the Value-added Tax for food products. However, the prospects for inflation to pick up are affected by increased domestic and international risks. Domestically, “risks stem[ming] from the fiscal and income policy stance, as well as from the adverse effects generated by legislative changes in the financial and banking areas,” are weighing on the Bank’s inflation forecast. Divergent monetary policies, increased uncertainty about the global economic recovery, persistently-low inflation in various countries and the fallout caused by the UK’s EU-membership referendum are among the external factors impacting the inflation forecast.

To counter these external and internal risks, the NBR decided to keep the rate unchanged in order to, “ensure and preserve price stability over the medium term in a manner conducive to achieving sustainable economic growth.” The Bank is scheduled to meet again on 4 August.

FocusEconomics Consensus Forecast panelists expect the policy rate to end 2016 at 1.85%. For 2017, the panel foresees the rate closing the year at 2.57%.

Author: Jean-Philippe Pourcelot, Economist

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Romania Monetary Policy Chart

Romania Monetary Policy June 2016 1

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

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