Isarescu: No reason for further reductions of the policy rate, we are ready to ensure the flexibility of inflation targets

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Romania had one of the mildest output losses in Europe in 2020 (- 3.9 percent) and is expected to have one of most vigorous rebounds in 2021, 6 percent respectively, according to the latest IMF forecast, said the central bank governor, Mugur Isarescu in a speech at the Regional Economic Outlook: Europe – IMF conference today.

Isarescu said that the inflation declined last year, from 4 at the end of December 2019, to 2 percent at the end of December 2020 and the budget deficit remained below 10 percent despite the strong measures taken since the outbreak of the pandemic and despite the large structural deficit at the end of 2019 (around 5 percent). The current account deficit lightly widened from 5 to 5.5 percent.

This year’s recovery is further enhanced by a thorough mobilization and implementation of the vaccination campaign in Romania. The rollout of the vaccination process goes pretty well, the authorities aiming to have 50 percent of the population vaccinated by summer. However, further improvements would be supportive for a brighter economic outlook, or, as very well summarized by the Managing Director Georgieva last week, the Vaccine policy is economic policy!”, the NBR governor stated.

According to Isarescu, at the Government level the measures adopted aimed to support the business environment and the consumers by tax reductions, exemptions and deferrals for payment obligations, economic stimulus by credit guarantees for SMEs affected by the coronavirus crisis and subsidized interest for loans, employment related-measures and social protection measures (such as possibility of working time reduction and 75% of salary paid technical unemployment and leave paid days for parents when schools closed), as well as customs measures including duty relief and exemptions for certain products and payment facilities including VAT deferral – to name the main lines of fiscal policy action.

The National Bank of Romania’s measures were to cut the interest rate from 2.5 percent in March last year to 1.25 percent currently. The central bank used the entire toolkit to provide liquidity to banks (reinstating regular repo operations; purchasing government bonds on the secondary market). We have also allowed banks to use their additional capital buffers, conditional upon a restriction on distributing dividends and to temporarily deviate from the minimum threshold of the liquidity coverage ratio.

In the meantime, we have closely monitored the evolution of non-performing exposures and asked banks to adequately provision especially when the ratio exceeded 5%, as well as requiring them to perform regular assessment and reporting on their largest exposures.”

“The Romanian authorities will continue to maintain appropriate support measures. However on the fiscal front we do see merit to start the consolidation. On the monetary front, we do not see reason for further reductions of the policy rate and we are ready to ensure the flexibility of our inflation targets having in mind the pretty elevated debt levels. With respect to the exchange rate, we stand ready to ensure more flexibility having in mind its role as anchor of social trust in the case of Romania,” he concluded.

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