Romania lowers policy rate to 5½%, to release inflation report Tuesday

By Marisa Wong

Madison, Wis., Feb. 2 - The board of the National Bank of Romania said it decided to lower the monetary policy rate to 5½% from 5¾% at its meeting on Thursday. The new rate was scheduled to take effect beginning Friday.

At the same time, the annual interest rate on the deposit facility will be cut to 1½% from 1¾%, while the overnight (Lombard) rate will be 9½% versus 9¾% previously.

The board said it also decided to maintain the existing levels of minimum reserve requirement ratios on both leu-denominated and foreign currency-denominated liabilities of credit institutions and to ensure adequate management of liquidity in the banking system.

The board made its decisions after examining and approving the quarterly inflation report, which will be released to the public in a press conference scheduled for Tuesday along with a 12-month calendar of the bank's board meetings dedicated to monetary policy issues.

According to a bank news release, annual inflation dropped to 3.14% in December from 7.96% in December 2010, in line with the bank's forecasts, while the annual adjusted CORE21 inflation rate fell to 2.37% versus last year's peak of 4.77% recorded in March.

These figures confirm the consolidation of disinflation, the bank said, with the annual inflation rate reaching the target against the background of a "prudent monetary policy stance," the fading-out of the first-round effect of the VAT rate hike and favorable trends in volatile prices, especially of food items.

As for domestic developments, data reveals a persistent negative output gap despite positive dynamics in exports, industrial and farming outputs, the board said. There is evidence of the current account deficit staying at sustainable levels but also a gradual recovery of credit to the private sector.

The board said that the external environment shows uncertainties remain regarding the resolution of the eurozone sovereign debt crisis, with impact on investors' risk aversion, capital flow volatility, as well as on global economic developments.

Overall, the bank said its new forecast reconfirms the perspective of inflation staying close to the 3% target throughout the horizon, which paves the way for preserving financial stability and enhancing the confidence of households and economic agents as essential pillars for a sustainable recovery of the Romanian economy.

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