The National Bank of Romania Board members present at the meeting: 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; Eugen Nicolăescu, Board member and Deputy Governor of the National Bank of Romania; Liviu Voinea, Board member and Deputy Governor of the National Bank of Romania; Marin Dinu, Board member; Daniel Dăianu, Board member; Gheorghe Gherghina, Board member; Ágnes Nagy, Board member; and Virgiliu-Jorj Stoenescu, Board member.
During the meeting, the Board discussed and adopted the monetary policy decision, based on the data and analyses on current and future macroeconomic, financial and monetary developments submitted by the specialised departments, as well as on other available domestic and external information.
Looking at the recent evolution of inflation, Board members noted that it had been in line with expectations. The annual inflation rate had seen a significant downward correction in July to 4.56 percent from 5.4 percent in the previous month, reaching 5.06 percent in August, i.e. slightly below the forecast. The fall versus June had been particularly induced by administered prices and fuel prices, mainly against the backdrop of some base effects. The developments in vegetable and fruit prices had had opposite influences, albeit of a lower magnitude.
It was remarked that core inflation as well had further contributed to the inflation slowdown, although only marginally, with the annual adjusted CORE2 inflation rate remaining virtually flat at 2.9 percent in July and subsequently declining to 2.8 percent in August, i.e. slightly below the forecast. The decline had been supported, that time too, by processed food and services, more visibly influenced by the dynamics of international prices of some agri-food items, including the associated base effects, as well as by the relative appreciation of the leu against the euro. An opposite effect worth mentioning had had the dynamics of non-food prices. Some Board members were of the view that, overall, core inflation was further marked by the unexpectedly sudden loss of momentum of consumer demand in 2018 Q1, associated with the moderation of the cyclical position of the economy, likely to exert an inertial influence on the price-setting behaviour on certain retail trade segments. Unit labour costs had, however, retained their double-digit annual dynamics in Q2 or had increased at faster rates, while short-term inflation expectations had remained elevated. Moreover, GDP deflator had continued to rise, while the annual growth rate of industrial producer prices of non-durables on the domestic market had turned upwards June through July.
Looking at the cyclical position of the economy, Board members first remarked the strong slowdown in the economy’s rate of increase versus last year. At the same time, it was noted that in Q2 the economic growth had seen, however, a slight re-acceleration, in annual terms, to 4.1 percent from 4.0 percent in Q1, given the step-up in its quarterly dynamics. That was indicative of a larger-than-expected re-widening of the excess aggregate demand April through June. Private consumption had continued to be the main driver of the economic advance, making an even somewhat higher contribution, as a result of the unexpected acceleration in its annual dynamics. It had been closely followed by the change in inventories, whose contribution to GDP dynamics had reached a 5-year high, whereas the contribution of gross fixed capital formation had turned negative again, amid the new contraction in annual terms reported by that component, after three quarters of growth in a row. Some Board members warned that the evolution was a matter of concern, considering the economy’s growth potential over the medium term. The contribution of net exports to the advance in GDP had remained negative, yet had diminished somewhat, in the context of a clearer deceleration in the growth rate of imports than in that of exports. The current account deficit had seen a small contraction versus 2017 Q2, on account of the improved balance on primary income. It was also shown that, on the supply side, the economic growth had benefited from an almost general support. The services sector had been further the main engine of growth, albeit making a somewhat lower contribution, whereas the industrial sector had had a notable, constant contribution.
Board members observed that the statistical data indicated a renewed labour market tightening in Q2. The ILO unemployment rate had posted a new quarterly decline to hit a historical low of 4.2 percent in May, remaining flat at this level through July as well, while the job vacancy rate had gone up for the second consecutive quarter. The number of employees economy-wide had continued to reach new highs, while its annual dynamics had stopped trending downwards in July, given the slight re-acceleration in its growth rate in the private sector, for the first time since 2017 Q1. Board members concluded that pressures on wages would be further on the rise in the near term, given the improvement in employment intentions in 2018 Q4, shown by surveys, as well as the higher difficulties in recruiting skilled labour. In that context, mention was made of the re-acceleration seen in Q2 by the annual growth rate of average gross nominal wage earnings, as well as of the double-digit range within which the indicator had remained in July, amid its slight moderation. At the same time, reference was made to the pick-up reported for the second straight quarter by the annual change in unit wage costs in industry, followed, however, by a marked decline in July.
Turning to discussions on monetary conditions, Board members showed that key interbank money market rates had seen their positive spread vis-à-vis the monetary policy rate narrow gradually after the resumption of repos by the central bank, while remaining at a high level. Some Board members highlighted that the spread was relevant from the perspective of judging the monetary policy stance. Reference was made to the continued relative stability of the EUR/RON exchange rate over the recent months, most likely attributable to the considerable differential of interest rates on the local market versus those prevailing in Europe and regionally.
It was noted that the robust growth of credit to the private sector had extended into July and August, at an annual pace of 6.6 percent in each month – only marginally below the Q2 average and slightly above the Q1 reading. In turn, the dynamics of the leu-denominated component had stuck to double-digit levels, while following a somewhat steeper downtrend, primarily on the back of housing loans and credit to non-financial corporations. However, the share of the domestic currency component in total private sector credit had further widened in July, before sticking to 65.3 percent in August.
As regards future developments, based on the latest data and analyses, Board members shared the view that the annual inflation rate would probably decline further in the near run, in line with the medium-term forecast published in the August 2018 Inflation Report, which anticipated its drop to 3.5 percent in December 2018 and then to 2.7 percent at end-2019. It was stated that the significant downward correction in inflation developments expected for Q4 was mainly ascribable to the base effects associated with the previous year’s increases in all CPI exogenous components: administered prices, fuel prices, tobacco product prices and VFE prices. The disinflationary contribution of supply-side factors was, however, seen to be more modest than in the latest medium-term forecast, given the unexpected hike in the electricity price in August, as well as the relative increase in oil prices. The latter might, nevertheless, exceed again expectations over the short time horizon, higher-than-anticipated rises being also possible in the case of some administered prices and the prices of some food items, owing to the African swine fever outbreak, the evolution of some grain prices on the international market, and to the sudden worsening of weather conditions in September. Some Board members cautioned that, were such adverse developments to materialise, the risk of de-anchoring inflation expectations would become increasingly relevant.
Examining the likely trend of inflationary pressures from the cyclical position of the economy, Board members noted that the new assessments reconfirmed the prospects for a marked deceleration in the annual economic growth in Q3 – largely on the back of negative base effects –, followed by a more modest re-acceleration in 2018 Q4, as quarterly GDP dynamics were expected to slow visibly versus Q2 and only marginally from the earlier forecast. It was shown that such an evolution implied a slightly slower widening of the positive output gap during the second half of the year than in the August forecast, yet at somewhat higher values than previously anticipated, as a result of its reopening above expectations in Q2.
In addition, it was observed that, according to the latest developments in high-frequency indicators, private consumption had remained the engine of economic growth in Q3 too, but also a major determinant of its deceleration. In turn, gross fixed capital formation may have made a more negative contribution to GDP dynamics during that period, the same as net exports, given that the differential between the annual growth rate of exports of goods and that of imports had become negative again in July, while the surplus on services had followed a steeper downward path versus the same year-earlier period. Against that background, in the first month of Q3, the current account deficit had widened again at a faster rate in annual terms. Deficit financing seemed, however, to be adequate in the opinion of some Board members, who nonetheless cautioned about the reduction in the share of autonomous financing in 2017.
In light of the mixed developments, Board members deemed that the uncertainties and risks surrounding the latest medium-term inflation forecast remained significant. Reference was made to the relative volatility of consumer confidence, which had however recently re-embarked on an upward path, as well as to the likely evolution of households’ real disposable income, inter alia amid the renewed tightening of labour market conditions, but also amid the potential developments in fuel and utility prices. Mention was also made of the lower-than-planned EU funds absorption and public investment spending, with unfavourable implications for the dynamics of gross fixed capital formation and ultimately for the internal and external equilibria of the economy, as well as of the legislative initiatives on the banking sector, with a potential adverse impact on lending to non-financial corporations.
Discussions also touched upon the risks to euro area’s economic performance induced by trade protectionism and the Brexit uncertainties, as well as by the situation in Italy and the global financial market volatility. Reference was implicitly made to the ECB’s monetary policy stance and to its relevance in terms of the decisions taken by central banks in the region. The recent financial turmoil in some emerging economies was also mentioned, while its spillover effects were deemed as modest and confined to the vulnerable economies in terms of macroeconomic fundamentals. Against that background, Board members underlined again the need for a balanced macroeconomic policy mix, to avoid the overburdening of monetary policy, with undesired effects in the economy. Moreover, most Board members reiterated the importance of an adequate dosage and pace of adjustment of the monetary policy stance, from the perspective of anchoring inflation expectations and maintaining the annual inflation rate on the trajectory shown by the NBR’s latest medium-term forecast, while safeguarding financial stability.
Under the circumstances, the NBR Board unanimously decided to keep unchanged the monetary policy rate at 2.50 percent, the deposit facility rate at 1.50 percent and the lending (Lombard) facility rate at 3.50 percent. In addition, 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.