Romania: Central Bank reduces the monetary policy rate to a new record low
November 6, 2014
At its 4 November meeting, the National Bank of Romania (NBR) decided to cut the monetary policy rate by 25 basis points. The rate cut from 3.00% to 2.75% met market expectations. The monetary policy rate now sits at the lowest level on record. The NBR also decided to maintain the minimum reserve requirements ratio on leu-denominated liabilities of credit institutions at 10.0%. However, the Bank did decide to cut the minimum reserve requirement ratio for foreign currency-denominated liabilities of credit institutions from 16.0% to 14.0%.
In an attempt to temper interest rate volatility on the money and banking markets, the NBR decided to narrow the symmetrical corridor around the monetary policy rate from plus/minus 2.75% to plus/minus 2.50%. As a result, the Bank lowered the lending facility from 5.75% to 5.25%, while it kept the deposit facility unchanged at 0.25%.
In its accompanying statement, the Central Bank noted that economic growth is continuing to decelerate on the back of weak domestic demand. Growth in investments has slowed while exports have experienced a slacker uptrend. Regarding price developments, the Bank pointed out that the annual inflation rate remains at low levels. This is the consequence of, “subdued developments in volatile food prices, low euro area inflation, as well as to the persistence of the negative output gap and the downward adjustment in inflation expectations.” In fact, in its latest monetary policy report, the Bank lowered its inflation projections for both this year and next. It now expects the annual inflation rate to be 1.5% in 2014, which is down from the 2.2% projected at its August’s Inflation Report. For next year, the NBR projects that inflation will pick up and close the year at 2.2%, which is also lower than the 3.0% previously forecast.
Against this background, NBR’s accommodative monetary policy is meant to ensure price stability in the medium-term in line with the Bank’s tolerance margin of plus/minus 1.0% around its target of 2.5%, along with creating favorable conditions for lending.
Author: Dirina Mançellari, Senior Economist