National Bank of Romania Opts for a Prudent Stance

June 27, 2012

Officials left Romania’s monetary policy rate at 5.25% despite a record low on-year CPI inflation rate of 1.79% in May.  Inflation fell by 0.6 percentage points from April and by 1.35 percentage points from the on-year pace last December.  The monetary policy rate is now 3.5 percentage points higher than inflation, giving Romania one of the highest real central bank interest rates. 

To be sure, the policy rate had been reduced four times and by a total of 100 basis points between November 2011 and March 2012, and that easing was on top of 225 basis points of monetary relief in 2009 and another 175 bps of rate cuts in 2010.  But since the last rate cut undertaken three months ago, officials have opted for the prudence of wait and see.  Their caution in part reflects concern for the vulnerability of the leu, Romania’s exchange rate which in late April touched a record low.  In addition, officials anticipate an upward trend in inflation but within the target range over coming quarters and want to guard against a second-order impact on expected inflation.  Such concern was expressed in today’s statement from the NBR, whose Board next meets August 2nd.

The uncertain external environment may lead to an abrupt heightening of risks associated with increased capital flow and exchange rate volatility, which, coupled with domestic developments related to the electoral context, calls for a further prudent monetary policy stance in order to efficiently anchor expectations and ensure both price and financial stability.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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