The Board of the National Bank of Romania (BNR) decided yesterday to keep the monetary policy rate unchanged at 5.25 percent per annum, a press release informs. This is the highest rate in the EU, after Hungary’s central bank (MNB) cut Tuesday its base rate by a quarter of a percentage point to 5.0 percent, its lowest ever level, in the first decision under controversial new head Gyorgy Matolcsy. Also, the Czech central bank kept interest rates near zero for a third meeting as policy makers debate whether to stimulate an economy racked by a record-long recession through a weaker koruna. The Ceska Narodni Banka kept the main two-week rate at 0.05 percent, in line with analysts forecasts.BNR decided to ensure adequate liquidity management in the banking system and to maintain the existing levels of minimum reserve requirement ratios on both leu and foreign currency-denominated liabilities of credit institutions.“BNR will closely monitor domestic and global economic developments so as, via an adequate use of its instruments, to ensure the fulfillment of its objectives to achieve price stability over the medium term and to maintain financial stability”, reads the statement.
The decision came as no surprise, as it was expected by all the players in the market. Maintaining the key interest was implicitly announced precisely by BNR governor Mugur Isarescu Wednesday. The head of the Central Bank said at that moment that interests will resume the downward trend only after the return within the targeted interval is confirmed, which is expected to occur in the second half of the year. “This is also the consensus of the market. (…) As we believe the inflation will go beyond the target set by the Central Bank for 2013, we expect the key interest to remain unchanged this year,” reads a note to customers sent by the economists of ING, quoted by hotnews.ro. “Inflation reached 5.7 pc in February, significantly over the BNR target of 2.5 pc +/- 1pp and will stay around this value until July. A good agricultural crop and limited second-round effects of higher energy prices are the key elements of our base scenario, in which we see lower inflationist pressures in the second half of the year. We continue seeing an annual inflation of 4.1 pc in December 2013, still above the BNR target. The adjusted CORE2 inflation which is closely monitored by BNR amounted to 3.1 pc in February. We believe that this will prevent the appearance of a monetary relaxing cycle in the near future. A possible reduction of the key interest level might occur in the first quarter of 2014, followed by a reduction of the reserve requirement for RON,” mentions a not signed by Eugen Sinca, the chief analyst of BCR.The analysis of the latest developments in macroeconomic indicators points to the resumption of disinflation, after the temporary pick-up in consumer price growth in January 2013, and to a relative improvement in economic activity, underpinned by favorable net export performance, BNR notes.
The annual inflation rate fell to 5.65 percent in February 2013 from the previous month’s reading of 5.97 percent, although remaining outside the variation band around the target and above the 4.95 percent level seen in December 2012. The annual adjusted CORE2 inflation rate 1 stood at 3.1 percent in February, marginally below the 3.2 percent figure in January 2013. Real GDP recorded positive growth in 2012 Q4, while the widening of the negative output gap slowed. Monetary indicators point to the real annual dynamics of lending to the private sector remaining in negative territory, similarly to credit developments in the euro area and in most countries in the region.“The monetary policy remained prudent, seeking to firmly anchor inflation expectations amid the transitory inflation bout and the heightened capital flow volatility, triggered by resurgent eurozone tensions stymieing investors’ risk appetite. As domestic political and financial tensions eased, BNR carefully calibrated the monetary policy instruments, also by shifting from firm to adequate liquidity management, which led to an improvement of liquidity conditions on the money market and hence drove interbank rates considerably lower”, according to the press release.
BNR’s current assessments reconfirm the prospects for the annual inflation rate to follow a downward trend, albeit remaining outside the variation band in the forthcoming months, with the persistence of the negative output gap being the main disinflation driver. Subsequently, the annual inflation rate is projected to reach the upward bound of the target band at end-2013. In line with the announced calendar, the next BNR Board meeting dedicated to monetary policy issues is scheduled for 2 May 2013, when the new quarterly Inflation Report is to be examined.