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 developments in inflation, Board members noted that the annual inflation rate had continued to rise above the upper bound of the variation band of the flat target in the first two months of Q2, climbing to 5.22 percent in April, from 4.95 percent in March, and to 5.41 percent in May. It was observed that the slightly faster-than-expected increase had been triggered by supply-side factors, especially the significant, larger-than-anticipated hikes in fuel prices – amid the rise in the oil price and in the exchange rate of the leu against the US dollar – and in tobacco product prices.
By contrast, the annual adjusted CORE2 inflation rate had practically seen a halt in its upward trend in April to reach 3.09 percent from 3.05 percent in March, while going down to 2.95 percent in May, slightly below the forecast. The decrease in that interval overall had been induced by the processed food and services components, more sensitive to the downward correction in the international prices of some agri-food products in that period and to the relative strengthening of the leu against the euro. Some Board members held the view that, beyond those influences, the evolution of core inflation was also indicative of a relative levelling-off, at least for a while, of the significant inflationary pressures from fundamentals, owing to the cyclical position of the economy. However, unit labour costs had posted again a faster annual growth or reported further two-digit dynamics in the first four months of 2018, while short-term inflation expectations had continued to see upward adjustments. Painting a slightly different picture, the annual change of industrial producer prices on the domestic market had recorded a small decline for non-durables February through April that could be, nevertheless, temporary.
Turning to the cyclical position of the economy, Board members remarked that, in Q1, economic expansion had witnessed a stronger-than-anticipated loss of momentum in annual terms – to 4.0 percent from 6.7 percent in 2017 Q4 –, given its stagnation in quarterly terms, implying a likely narrowing of excess aggregate demand contrary to expectations of a slight increase. Private consumption had continued to be the main driver of GDP growth, making, however, a considerably lower contribution, given the sharp deceleration in its annual dynamics, possibly owing, inter alia, to a stronger decline in household confidence and the severe slackening in the rate of increase of households’ real disposable income. The contribution of gross fixed capital formation had remained positive as well, although decreasing markedly, mainly following a strong drop in residential buildings. Conversely, the contribution of net exports to the advance in GDP had improved, in the context of a clearer deceleration in the growth rate of imports than in the dynamics of exports. It was noticed that, against that background, the current account deficit had posted a slower pace of increase against the same year-earlier period, while remaining at an elevated level. On the supply-side, services had further been the main contributor to economic growth, followed at a certain distance by industry, both of them reporting, however, lower contributions.
Board members noticed that labour market tensions had picked up, however, in the first months of the year, with the further decrease in the ILO unemployment rate to a 4.4 percent historical low in March – followed, nonetheless, by a rise to 4.6 percent in April –being accompanied in Q1 by the advance in the job vacancy rate after two consecutive quarters of decrease. Moreover, the number of employees economy-wide had continued to grow, reaching a new peak in April, concurrently with its slower advance in annual terms. Board members concluded that pressures on wages would remain elevated in the near run, given, inter alia, the relatively more optimistic employment expectations for Q3, as well as the enhanced difficulties facing employers in recruiting personnel, as indicated by surveys and research studies. In that context, reference was made to the renewed substantial step-up in the annual growth rate of average gross nominal wage earnings in March, owing also to developments in the private sector, followed by only a slight moderation in April. It was also shown that the annual dynamics of unit labour costs had accelerated in Q1, across the economy as a whole, as well as across industry, where it had continued to increase in April too, in the context of a slower labour productivity growth rate. Mention was also made of the opposite effects stemming from the pick-up in the annual inflation rate on the annual growth rate of real net wage, which remained, however, relatively high.
Looking at monetary conditions, Board members deemed that they had been more visibly less accommodative in Q2, mainly due to the tightening of central bank control over banking system liquidity starting mid-April and the increase in the monetary policy rate by another 0.25 percentage points in May. Reference was made to the significant rises in the relevant interbank money market rates versus the previous quarter, as they had climbed and consolidated significantly above the policy rate, as well as to the further relative stability of the EUR/RON exchange rate, also amid the considerably larger differential between interest rates on the local market and those prevailing in Europe and regionally. The relatively faster upward adjustment of interest rates on new time deposits in April and May was also pointed out, including when compared to that seen in lending rates on new business, implying a narrowing of the spread between them – an evolution anticipated to continue in the near run, against the background of the pass-through of the recent hikes in interbank money market rates.
At the same time, Board members noted that the annual growth rate of credit to the private sector had stepped up April through May compared with the Q1 average. The stronger momentum had mainly been attributable to the firming of the high dynamics of leu-denominated loans to households, driven by consumer credit. The pace of increase of domestic currency loans to non-financial corporations had remained robust as well, albeit decelerating slightly against the Q1 average. The domestic currency component had further widened its share in total credit to 64.7 percent in May.
When discussing future developments, Board members remarked that the new data and assessments reconfirmed the outlook for the annual inflation rate to level off above the variation band of the target over the next months, in line with the medium-term forecast published in the May 2018 Inflation Report, according to which the annual inflation rate was expected to return in the vicinity of the upper bound of the band at end-2018, before re-entering the band and staying in its upper half during 2019. Moreover, it was noted that the slightly higher-than-forecasted readings likely to be recorded by the annual inflation rate over the very near-term horizon were ascribable to supply-side factors, namely the relatively faster dynamics anticipated for VFE, fuel and tobacco product prices. In that context, some Board members voiced again their concern that such inflation developments might de-anchor inflation expectations over the medium term, considering also that the relevance of that risk could be heightened by a potential higher-than-expected increase in some administered prices and in the international oil price.
Looking at the potential future behaviour of inflationary pressures from fundamentals, Board members remarked that the new assessments reconfirmed the prospects for a further deceleration in economic growth during Q2 and Q3, at a slightly faster pace than projected in May, as quarterly GDP dynamics were seen on the rise compared with Q1, but lower than those indicated by the latest medium-term forecast. It was deemed that, in the context of recent developments, such an outlook implied lower values of the positive output gap during the first three quarters of 2018 and a possible change in its pattern against the May forecast, which had anticipated excess aggregate demand to increase further in 2018 H1 and then remain quasi-steady until towards mid-2019. On the other hand, some Board members highlighted that the narrowing of the positive output gap was a natural development, towards ensuring the sustainability of economic growth.
In addition, it was noticed that, according to the latest developments in high-frequency indicators, private consumption had probably remained in Q2 the engine of economic growth, but also a determinant of its deceleration. A steeper decline in the positive contribution was, however, expected from gross fixed capital formation, while in the case of net exports the return to a positive contribution was possible, given that the differential between the annual growth rate of exports of goods and that of imports, which had become positive in March, had widened in April; at the same time, the positive services balance had stuck to the downtrend it had embarked on towards end-2017.
In the Board members’ assessment, the mixed developments in the first months of the year heightened the uncertainties associated with the inflation outlook shown by the latest medium-term forecast and the risks thereto. It was agreed that, at the current juncture, they stemmed primarily from developments in household confidence and the likely evolution of households’ real disposable income, inter alia amid tight labour market conditions and rises in certain income categories, but also amid the potential impact exerted by the increase in fuel and some utility prices. Reference was also made to the EU funds absorption well below the programme coordinates, as indicated by the budget execution in the first five months of the year, to the uncertainties surrounding the public policy outlook, with implications for the investment dynamics, as well as to the new legislative initiatives regarding the banking sector, with a potentially adverse impact on lending, including on the non-financial corporations’ segment.
Discussions referred to the recent downward and upward revisions of the short-term GDP growth outlook in the euro area and the U.S. respectively, as well as to the risks to global economic expansion stemming from the possible escalation of trade protectionism and of geopolitical tensions. International financial market developments were noted, marked in the recent period by the decline in global risk appetite, with a major impact on emerging economies, particularly on those with high vulnerabilities, and with visible effects also at a regional level. The monetary policy stances of the major central banks were implicitly touched upon, particular relevance being attached to the approach of the ECB and that of central banks in the region. Against that background, Board members reiterated the need for a balanced macroeconomic policy mix, deemed essential also from the standpoint of avoiding the overburdening of monetary policy and preventing undesired effects in the economy. Moreover, the importance of an adequate dosage and pace of adjustment of the monetary policy stance was again underlined, 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.