On 12 May 2021, the Board of the National Bank of Romania held a meeting in which the following members took part: Mugur Isărescu, Chairman of the Board and Governor of the National Bank of Romania; Florin Georgescu, Vice Chairman of the Board and First Deputy Governor of the National Bank of Romania; Leonardo Badea, Board member and Deputy Governor of the National Bank of Romania; Eugen Nicolăescu, Board member and Deputy Governor of the National Bank of Romania; Csaba Bálint, Board member; Gheorghe Gherghina, Board member; Cristian Popa, Board member; Dan-Radu Rușanu, Board member; Virgiliu-Jorj Stoenescu, Board member.
During the meeting, the Board discussed and adopted the monetary policy decisions, based on the data on and analyses of recent characteristics and the medium-term macroeconomic outlook submitted by the specialised departments, as well as on other available domestic and external information.
Looking at the recent developments in consumer price dynamics, Board members showed that, in March 2021, the annual inflation rate had fallen somewhat less than expected to 3.05 percent from 3.16 percent in February. However, it had increased considerably from 2.06 percent in December 2020, under the transitory impact of the liberalisation of the electricity market for household consumers and following the rise in fuel prices driven by higher oil prices. The action of those factors had been only partly counterbalanced by the disinflationary influences from the VFE and tobacco product segments, as well as from core inflation deceleration.
It was noted that the annual adjusted CORE2 inflation rate had continued to decrease in line with expectations in Q1, falling to 2.8 percent in March from 3.3 percent in December 2020, mainly on account of the disinflationary base effects associated with developments in the prices of some processed food items. Mild downward pressures had also stemmed from the services segment, being, however, mainly ascribable to a slower depreciation in annual terms of the leu against the euro, while the non-food sub-component had generated small opposite effects. The latter had probably come from the strong demand for such goods, as well as from supply-side disruptions and costs linked with the pandemic and with the measures to prevent the coronavirus spread.
It was deemed, in that context, that the influences of the aggregate demand deficit were further barely observable in core inflation, inter alia given that its dynamics were still marked by the pre-pandemic underlying inflationary pressures and short-term inflation expectations had seen a visible rise in the first months of the current year. Other factors also deemed relevant were the still robust advance in households’ real disposable income in the recent period, but especially the faster annual dynamics of industrial producer prices on the domestic market for consumer goods, and particularly for durables.
As for the cyclical position of the economy, Board members remarked that the second preliminary version of statistical data reconfirmed the 4.8 percent economic growth in 2020 Q4 and the slower GDP decline in annual terms to -1.4 percent from -5.6 percent in Q3, which implied the absorption to a very large extent of the aggregate demand deficit at the end of the prior year, even slightly more pronounced that previously estimated. Looking at the structure of recovery determinants, some Board members noted however some changes, particularly the increase in the prevailing contribution of the change in inventories, as well as the marginally positive contribution of general government consumption, instead of the notable negative contribution indicated by the previous data. Conversely, the positive impact of gross fixed capital formation on GDP dynamics had been on the wane versus Q3, although the former had seen a slightly faster annual pace of increase; at the same time, the influences of household consumption had been relatively more unfavourable, given the renewed stronger contraction in purchases, yet almost entirely on account of services and largely offset in terms of impact by the sizeable rise in other sub-components.
Overall, the sole contribution of domestic demand to economic recovery in 2020 Q4 had been larger than previously estimated, some Board members observed, whereas the negative contribution of net exports had risen to a larger extent, amid a more visible increase in the differential between the upward dynamics of imports and those of exports of goods and services, entailing also a new widening of the trade deficit compared to the same period of the previous year. Under the circumstances, as well as following a more pronounced worsening of the primary income balance, the current account deficit had widened significantly faster in annual terms, in spite of rising inflows of EU funds to the current account. Its share in GDP had thus gone up to 5.2 percent in 2020 from 4.9 percent in 2019 – the evolution causing concern also in view of its singular nature across the region in the context of the pandemic crisis and being ascribable to a large extent to entrenched, structural causes.
Turning to near-term prospects, Board members shared the view that economic activity would probably continue to recover in 2021 H1, yet amid a significant slowdown in Q1, followed by a modest acceleration in Q2, the same as in the previous assessments. Board members underlined that, against that background, thanks to the strong revival of the economy in 2020 H2, in mid-2021 the GDP loss recorded in 2020 Q2 could be largely recovered alongside the full closing of the negative output gap.
The slower economic recovery in early 2021 was deemed to have been uneven from the perspective of aggregate demand components and at sectoral level, amid the mixed developments recorded in the first months by the most relevant high-frequency indicators. Thus, retail trade had posted a mildly faster increase in annual terms in Q1 and the annual dynamics of motor vehicles and motorcycles sales had witnessed a strong return to positive territory January through February; at the same time, market services to households had recorded a lower contraction (by almost a half) in annual terms, amid the easing (at least for a while) of some restrictions on the hospitality industry.
By contrast, the volume of construction works had dropped slightly in annual terms in January-February and the dynamics of the industrial output had moved again deeper into negative territory, concurrently with the slower growth in new manufacturing orders, while net direct investment had continued to contract from the same year-earlier period, albeit entirely on the back of intercompany lending. Board members identified as matters of concern the faster increase in annual terms of the trade deficit in the first months of the year – amid a more visible re-acceleration of the annual decline of exports of goods and services –, as well as the strong widening of the current account deficit from the same year-earlier period (also due to the marked deterioration of income balances), accompanied by the pronounced worsening of its coverage by autonomous capital flows.
Looking at labour market developments, Board members observed a mild deterioration of its parameters in the first two months of 2021 – under the impact of the resurgence in the pandemic and the new tightening of restrictive measures in 2020 Q4 –, but also the subsequent relative improvement in some developments, as well as the notable signals on the recent increase in labour demand shown by surveys and specialised firms. Thus, it was noted that January through February, the slow recovery path of the number of employees economy-wide had come to a halt, with its annual dynamics moving marginally deeper into negative territory, while the ILO unemployment rate had seen a slight advance. In addition, the annual growth rate of wage earnings had decelerated, especially in the case of net real wage, on the back of developments in both the public and the private sectors.
However, the annual unemployment rate had corrected its upward path in March and hiring intentions and job vacancies had risen markedly in recent months – to even higher values than the pre-pandemic ones in some sectors and regions –, indicating, in the Board members’ view, a clear and considerably earlier revival trend in labour market conditions. That could be given a boost by the potential easing in the near run of some social distancing rules, amid the gradual improvement in the epidemiological situation and the faster pace of vaccination domestically and across Europe. Board members agreed that, nevertheless, uncertainties lingered with regard to the capacity and pace of recovery of the sectors and activities affected to a larger extent/for a longer period of time by the medical situation and the mobility restrictions, inter alia in the context of the transitory nature of government support measures, which might entail later on restructuring or winding-up of some firms. Over a longer horizon, the following were found to be relevant: the tendency to expand automation and digitalisation domestically, the possible definitive relocation to Romania of some local workers working abroad, but also possible future actions designed to enhance the efficiency of public spending, carrying the potential to affect labour market evolution, apart from capping public sector wages.
Relative to financial market conditions, Board members showed that relevant interbank money market rates had largely corrected in April their increase recorded halfway through the previous quarter. Government security yields had also posted significant downward adjustments, remaining however visibly above the historically very low readings reached in mid-February, prior to the heightening of international financial market volatility. At the same time, after the upward adjustment in March, the EUR/RON exchange rate had continued to rise slowly in the first part of April, before tending to stabilise in the new range, inter alia amid the interest rate differential, which also reflected the higher risk premium attached to investments on the local financial market, some members underlined.
In turn, lending rates on the main types of new business to non-bank clients had continued to go down or had consolidated at low values February through March 2021, also against the backdrop of the renewed decline in the IRCC level in Q1. Some Board members pointed out that the downtrend of this index, which had extended into Q2, was expected to steepen markedly in Q3, before almost fading away in the last three months of the year.
Mention was made of the contribution from the downward path of interest rates to the revival of lending starting in 2020 H2, alongside the major influences of government programmes and the strong economic recovery. It was remarked that the annual dynamics of credit to the private sector had stepped up to 6.6 percent in March 2021, as the flow of domestic currency loans had increased to a historical high, without a significant contribution from government programmes, and that peak or close-to-peak values had been recorded for both customer segments, as well as for the main types of loans. Under the circumstances, the leu-denominated component had seen its annual growth rate accelerate considerably, up to two-digit readings in March, while its share in total credit to the private sector had widened to 70.1 percent, a record high for the post-January 1996 period.
As for future macroeconomic developments, Board members discussed at length the new anticipated inflation pattern, showing that it was markedly higher in the short term than in the previous forecast and to a smaller extent over the latter part of the projection horizon. Specifically, the annual inflation rate was expected to climb visibly above the upper bound of the variation band of the target in 2021 H2, to 4.1 percent in December 2021 from 3.4 percent in the earlier forecast, before returning to the upper half of the band at the onset of 2022 and subsequently remaining therein – close to 3.0 percent –, slightly above the 2.8 percent level anticipated previously for December 2022.
It was observed that the worsening of the short-term inflation outlook was again attributable almost entirely to the current and future action of supply-side factors, with stronger-than-previously-anticipated inflationary influences being expected in the current context from developments in fuel, electricity and natural gas prices. Board members remarked that those developments would, however, generate mild disinflationary base effects in 2022 – adding to the major ones stemming from the increase in electricity prices in January 2021 and the hike in oil prices in 2021 Q1 –, with the pick-up in the annual inflation rate above the variation band of the target being therefore temporary. Two-way influences over different time horizons, yet similar in terms of intensity to those forecasted previously, were expected to come also from the evolution of tobacco product prices, as well as from the uptrend in some international agri-food commodity prices, affecting core inflation in particular.
The inflationary impact of all those factors could, nevertheless, be stronger and lengthier, inter alia via their indirect effects, Board members cautioned, referring repeatedly to the sharpening synchronised uptrends in many commodity prices and to the bottlenecks in production and supply chains, conducive to a step-up in inflation worldwide. At the same time, some members pointed out that there were favourable signs of very good agricultural output domestically, at least on certain segments, with potential positive consequences on some agri-food prices, whereas natural gas and electricity prices could rather see relatively faster dynamics, also amid the recently manifest rigidity of free market offers. It was deemed that the potential of those risks to exert a lasting impact on medium-term expectations and thus trigger second-round effects, in the event of their materialising, remained however subdued, but warranted the close monitoring of all developments.
Board members concluded that, over the latter part of the projection horizon, the higher anticipated values of the annual inflation rate were, however, attributable to underlying pressures, which were expected to exhaust their slightly disinflationary action in a short while and then become more visibly inflationary than in the previous forecast, although gaining momentum gradually. The main rationale was the outlook for a faster widening of the positive output gap after its reopening in 2021 Q3, in the context of relatively swifter economic growth, spurred by committing EU funds allotted to Romania under the Recovery and Resilience Facility. At the same time, however, the following were deemed relevant: i) the lagged pass-through of the inflationary effects from the positive output gap; ii) the likely improvement in the composition of aggregate demand in terms of its inflationary potential, through a higher contribution of investment to the detriment of private consumption, with implications also for the future evolution of potential GDP; iii) the prospects for a visible deceleration in the growth rate of unit labour costs over the projection horizon, mainly amid the persistence of labour underutilisation and hence loose labour market conditions.
It was noted that mild inflationary effects were also expected from non-energy import price dynamics, while in the short run such influences would likely stem also from the abrupt rise in demand for services after the removal of mobility restrictions, possibly amid supply-side constraints. Against that background, the annual adjusted CORE2 inflation rate would probably decline at a slower pace in the following months, before re-embarking and remaining on a slight uptrend – instead of stabilising in the vicinity of 2.7 percent, as previously anticipated –, climbing to 2.8 percent in December 2021 and to 3.1 percent at the end of the forecast horizon.
Turning to the future cyclical position of the economy, Board members remarked that the economy would probably advance at a markedly swifter pace in 2021-2022 than envisaged earlier, at quarterly growth rates comparable to those in pre-pandemic years. The quarterly dynamics were expected to pick up as of 2021 Q2, amid vaccination progress and the easing of restrictive measures, as well as in the context of faster economic growth in the euro area/EU, but also due to European funds under the Next Generation EU programme probably committed starting 2021, likely to mitigate or counterbalance the contractionary impact of the fiscal consolidation presumed to be carried out gradually over the medium term. It was shown that those developments rendered likely a renewed reversal in the cyclical position of the economy in 2021 Q3, the same as in the prior forecast, but also a subsequent rise – relatively swifter and to higher values – in excess aggregate demand, even amid potential GDP dynamics markedly revised upwards.
At the same time, it was pointed out that, while higher than in the previous projection, the expected private consumption dynamics – decisive for the forecasted economic growth – would nevertheless remain visibly lower than the pre-pandemic years’ average across the forecast horizon. That was seen to occur despite the major statistical effect in 2021 and the pent-up demand that would probably surface in the short run, amid the easing of mobility restrictions. By contrast, gross fixed capital formation was expected to post markedly faster dynamics than the average for the 2016-2019 period and significantly higher than previously envisaged. That would imply a relatively larger contribution to economic advance, amid the increased volume of public investment expenditures and their stimulative effect on the private sector, as well as a result of committing, especially in 2022, a large part of European funds under the Next Generation EU programme.
In turn, net exports would probably see their contractionary impact diminish more markedly in the current year and very modestly in 2022, given the relative step-up in external demand, alongside the more solid increase in domestic absorption. The current account deficit would, however, remain unchanged as a share of GDP in 2021-2022, visibly above European standards, inter alia in the context of additional imports probably associated with reforms financed through the Next Generation EU programme, some Board members pointed out, voicing concerns about the implications of the evolution for the financing structure and cost related to that balance.
Board members agreed that the uncertainties about the new forecast and the risks thus induced to the inflation outlook remained considerable, stemming mainly from the evolution of the pandemic and of the restrictive measures – especially in the latter part of 2021 –, largely dependent on the extent and effectiveness of the vaccination process domestically, across Europe and worldwide.
Several members were of the opinion that a major source of uncertainties also consisted in the absorption rate of the EU funds allocated to Romania via the Recovery and Resilience Facility, as well as of those under the new Multiannual Financial Framework 2021-2027. They referred to the requirements of the new European programme and to the still ongoing work on the National Recovery and Resilience Plan, as well as to the institutional capacity and past performance of Romania in this field. By contrast, the investment dynamics could benefit from the possible relocation to Romania of European companies’ production facilities from other continents – in the context of plans to shorten production chains –, conditional, however, on domestic improvements in infrastructure, legal framework predictability and digitalisation of the economy, some Board members reiterated.
As for the future stance of fiscal policy, Board members underlined again the potential favourable implications of the budget consolidation initiated in 2021 for the external imbalance – in need of correction – and hence for the sovereign risk premium and financing costs. Nevertheless, uncertainties lingered with regard to the magnitude, pace and instruments of budget consolidation over the medium term, Board members showed, mentioning the still ongoing procedure related to the 2021-2024 Convergence Programme. At the same time, the relative improvement of the Q1 budget execution was pointed out, yet inter alia on account of some base effects and the collection of deferred payment obligations. Reference was also made to the changed prospects for some real and nominal variables in the economy vis-à-vis the budget planning assumptions, with a favourable impact on the dynamics of budget revenues, but also to the large volume of permanent expenditures.
In the Board members’ unanimous opinion, the analysed context warranted leaving unchanged the monetary policy rate and the interest rates on the NBR’s standing facilities. Such a calibration of the monetary policy conduct aimed to preserve price stability over the medium term in line with the 2.5 percent ±1 percentage point flat inflation target, in a manner supportive of the recovery of economic activity in the context of fiscal consolidation, while safeguarding financial stability. Moreover, it was deemed necessary to closely monitor domestic and global developments so as to enable the NBR to tailor its available instruments in order to achieve the overriding objective regarding medium-term price stability.
Under the circumstances, the NBR Board unanimously decided to keep the monetary policy rate at 1.25 percent; moreover, it decided to leave unchanged the deposit facility rate at 0.75 percent and the lending (Lombard) facility rate at 1.75 percent. Furthermore, the NBR Board unanimously decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.