BNR, on keeping the interest rate stable: We need to ensure inflation reduction, but also futher economic growth

Aurel Dragan 04/04/2018 | 17:32

Inflation will not exceed 5 percent by much and afterwards will go down, said the governor of the National Bank of Romania, Mugur Isarescu.

This is the main explanation why the BNR decided to keep the policy rate unchanged at 2.25 percent.

“What we are looking for is a mix of policies, both monetary and fiscal, in order to ensure inflation reduction and further economic growth”, said Isarescu. “But not every monetary policy decision counteracts fiscal policy decisions”.

The head of BNR showed that “a good treatment doesn’t only mean what medicine is needed, but also in what dosage should be applied”, that being the essence of today’s decision.

Based on data and figures in the economy and in the markets, the central bank is taking steps aimed to keep inflation under control. On the other side there is the fiscal policy decided by the government, which has its own mandate, given by the voters. So, there must be a balance between the policies so we can still have a good economic evolution without high inflation or foreign exchange volatility.

Regarding the RON, the governor pointed out that we have seen a stable currency after the second increase of the policy rate, which was good for the economy and for the current account deficit. “We don’t want to fight inflation at the cost of commercial balance deterioration,” so there should not be depreciation of the Romanian currency against the euro.

The problem for the economy is that the current account deficit is close to 4 percent and above this level the Romanian economy becomes dependent on foreign investors and capital inflows. So that is an indicator that we should all be interested in.

As for the banking system, where the interest rates are not coupled with BNR policy rate, the message is that the excess of liquidity will not be there forever. The excess of cash liquidity is seen as the reason why bank still have very low interest rates for long term deposits for the clients and also for very short term (under three months) between them (interbank rates). But, as we saw last year, the liquidity can disappear quickly, so the banks should have a longer term vision. Bottom line is that the governor expects banks to bring up the interest rates pretty soon and also to reduce the gap between deposits and loan interest rates.

”The next policy rate decision, the one in May, will be based on economic evolution in Romania and in other countries and the way that the markets and the investors will receive today’s decisions,” said Isarescu, showing that there is much uncertainty in our country and in the world.

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