Romania: Central Bank lowers policy rate to a new record low
February 4, 2015
At its 4 February meeting, the National Bank of Romania (NBR) decided to reduce the monetary policy rate from 2.50% to 2.25%. The decision met market expectations and marked a new record low. However, mirroring its previous decision in January, the NBR decided to keep the minimum reserve requirements ratio on both leu-denominated liabilities and foreign currency-denominated liabilities of credit institutions unchanged at 10.0% and 14.0%, respectively.
In order to mitigate interbank money rate volatility in the banking sector, the NBR decided to narrow the symmetrical corridor around the monetary policy rate from plus/minus 2.25% to plus/minus 2.00%. As a consequence, the Bank lowered the lending facility (Lombard) from 4.75% to 4.25%, while it kept the deposit facility unchanged at 0.25%.
In its accompanying statement, the Central Bank pointed out that the economy gained momentum in the fourth quarter of last year, as suggested by increased retail sales and improved performance in the industry and construction sectors. In addition, the Bank noted that real growth rate of domestic currency loans picked up due to the pass-through effect of the successive policy rate cuts.
Regarding price developments, inflation continued on a downward path, averaging 0.8% year-on-year in December, which was down from the 1.3% tallied in the previous month. Against this backdrop, the Bank decided to lower its inflation forecast for 2015. The NBR now foresees inflation ending 2015 at 2.1% (previously estimated: +2.2%) and 2016 at 2.4%. As the Committee pointed out, “the downward shift of the inflation path stems primarily from the anticipated steeper year-on-year drop in volatile prices over the short term, mainly on account of the decline in international oil prices, from the persistence of the negative output gap, the consolidation of inflation expectations at lower levels, as well as from the ongoing subdued inflation and weak economic recovery in the euro area and other European countries.”
Finally, the Committee commented that the NBR’s accommodative monetary policy is meant to ensure price stability over the medium-term, and to maintain inflation within the Bank’s tolerance margin of plus/minus 1.0% around its target of 2.5%.
Author: Cecilia Simkievich, Economist