The Board of the National Bank of Romania (NBR) met last Thursday to analyse the recent evolutions registered by the macroeconomic indicators and to assess the outlook for the near future. The Board also decided to cut the intervention rate by 0.50 percentage points, down to 17.75 percent, to "validate the disinflation process".
"The consumer price index for the past twelve months has dropped to 10.8 percent in October 2004 and it is estimated that the decrease of this index will continue at a faster pace in November and December. To validate this disinflation process, the Board of the National Bank has decided to cut the intervention rate by 0.50 percentage points, down to 17.75%," according to a NBR release.
At the same time, the NBR Board has also decided to continue to enforce a prudent monetary policy in order to reach the inflation targets, including the long-term objectives. The central bank plans to maintain the increasing trend of aggregate demand for the following period and is also taking into account the possibility that administered prices may go up at the beginning of 2005.
Having assessed the latest evolutions visible on the financial market since the previous monetary policy measures, the NBR Board concluded that the decision to enforce a policy enabling greater flexibility of the domestic currency's exchange rate has led to a substantial increase in the volume of transactions conducted on the forex market and to a sensibly higher amplitude of the exchange rate's variability.
"The improved investment rating granted to Romania is very likely to contribute to a bigger flow of direct and portfolio foreign investment, which will in turn trigger the consolidation of the domestic currency's appreciation trend, as the market continues to induce a manifest variability of the ROL's exchange rate. This points to a permanently consolidating monetary policy, which contributes to the disinflation process," the National Bank of Romania considers.
Since June 2004, when the central bank felt it was time to signal the beginning of an interest rate decreasing trend, six cuts have been operated, cumulating 3.25 percentage points. However, these cuts have not had a significant impact upon the level of interest rates levied by the commercial banks in relation to the non-banking customers.
Beside the consolidation of public trust in maintaining the inflation decline, NBR is under pressure because of the need to reduce rates on the Romanian market as foreigners will be granted access to banking deposits in ROL starting with April 2005.
Lower rates and increased variability of the exchange rate may be the main protection instruments against the potential speculative capital flows.
The inflation rate may go down to 9.5% at the end of December, only to go up again in the first three months of 2005, being likely to range between 10 percent and 10.6 percent in late March 2005, according to estimates issued by the National Bank of Romania.
razvan.voican@zf.ro
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