Isarescu: Latest inflation developments pave the way for financial stability and economic growth

The consolidation of inflation within the variation band around the target paves the way for maintaining financial stability and achieving sustainable economic growth, Governor of the National Bank of Romania (BNR) Mugur Isarescu told a news conference on Thursday.

However, domestic risks related to upcoming elections, along with uncertainties regarding developments in the external environment, capital flows and volatile prices require a further judicious adjustment of monetary policy instruments in order to effectively anchor inflation expectations and ensure price stability in the medium run, added Isarescu.

The annual inflation rate continued to slide, reaching 2.6 percent in February 2012 versus 3.14 percent in December 2011. The annual adjusted CORE 2 inflation rate – calculated by the BNR by excluding administered prices, volatile prices, and tobacco and alcohol prices from the consumer price index – also dropped to 2.05 percent from 2.37 percent in December 2011.

The fall in the annual inflation rate to a record low is the result of the implementation of the economic and financial programme agreed under the external financing arrangements with the European Union, the International Monetary Fund and other international financial institutions. Against the background of keeping adequate real broad monetary conditions, the fading-out of the VAT hike impact and the relatively favourable developments in food prices have contributed to a rapid slowdown in inflation.

„In this context, the central bank in the autumn of 2011 started a rate-cut and adequate liquidity management cycle, its moves rapidly feeding through into inter-bank money market rates which fell below the policy rate. Improved money market conditions triggered a steadily downward trend of government securities yields on the primary market, while the secondary market also became more active, with a favourable impact on the redistribution of liquidity in the banking sector,” said Isarescu.

In this context, the BNR Administration Board on Thursday decided to lower the monetary policy rate to 5.25 percent per annum from 5.50 percent per annum. Thus, starting March 30, 2012, the annual interest rate on the deposit facility will be cut to 1.25 percent from 1.50 percent, while the overnight (Lombard) rate will be 9.25 percent per annum versus 9.50 percent previously.

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