Monetary policy rate up again to 3.75 percent

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The Board of the National Bank of Romania, having convened for the meeting of 10 May 2022, decided to increase the monetary policy rate to 3.75 percent per annum, from 3.00 percent per annum, as of 11 May 2022, as well as to raise the lending (Lombard) facility rate to 4.75 percent per annum from 4.00 percent per annum and the deposit facility rate to 2.75 percent per annum from 2.00 percent per annum, as of 11 May 2022.

The central bank also agreed to maintain firm control over money market liquidity and to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The annual inflation rate surged again in March 2022, climbing to 10.15 percent from 8.53 percent in February, mainly following a stronger pick-up in processed food and fuel prices, under the impact of the sharp rise in agri-food commodity and crude oil prices, once with Russia’s invasion of Ukraine and the imposition of international sanctions, NBR argues.

In 2022 Q1, the annual inflation rate thus recorded a further significant, higher-than-expected increase (from 8.19 percent in December 2021), with exogenous CPI components making however a far more modest contribution, given the capping schemes for households’ energy bill. Against this background, the slower growth rates of electricity and natural gas prices in Q1 have largely offset the influences of the strong rises in fuel and VFE prices.

Moreover, a deceleration in annual GDP dynamics was reconfirmed, i.e. to 2.4 percent in 2021 Q4 from 6.9 percent in the previous three months, on account of the notably slower pace of domestic absorption. Conversely, net exports made a lower negative contribution to GDP growth, as the annual dynamics of the import volume of goods and services declined faster than those of the export volume. Against this background, the annual increase in the negative trade balance decelerated considerably as against Q3, due also to the narrowing of the unfavourable differential between the change in import prices and that in export prices. However, the current account deficit widened in annual terms at a significantly faster pace, under the impact of the worsening of the secondary income balance, with its share of GDP climbing consequently to 7.0 percent in 2021 as a whole, from 5.0 percent in 2020.

However, uncertainties and risks are also associated with the fiscal policy stance, given the requirement for further fiscal consolidation amid the excessive deficit procedure and the overall tightening trend of financing conditions, yet in a challenging economic and social environment domestically and globally, strongly marked by the war in Ukraine and the sanctions imposed.

Particularly relevant are also the ECB’s and the Fed’s prospective monetary policy stances, as well as the level and pace of increase of key rates by central banks in Czechia, Poland and Hungary, the central bank further argued.

Based on the currently available data and assessments, as well as in light of the extremely elevated uncertainty, the NBR Board decided to increase the monetary policy rate to 3.75 percent per annum from 3.00 percent per annum as of 11 May 2022. Moreover, it decided to raise the lending (Lombard) facility rate to 4.75 percent per annum from 4.00 percent per annum and the deposit facility rate to 2.75 percent per annum from 2.00 percent per annum, as well as to maintain firm control over money market liquidity. Furthermore, the NBR Board decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The NBR Board decisions aim to anchor inflation expectations over the medium term, as well as to foster saving through higher bank rates, so as to bring back the annual inflation rate in line with the 2.5 percent ±1 percentage point flat target on a lasting basis, in a manner conducive to achieving sustainable economic growth,” the NBR concluded.

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