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; 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 the recent characteristics and the updated medium-term forecast of macroeconomic developments submitted by the specialised departments, as well as on other available domestic and external information.

In their addresses, Board members first referred to recent inflation developments. It was noted that, after the pick-up seen in August, the annual inflation rate had witnessed a somewhat larger-than-anticipated drop in September, down to -0.57 percent, as a result of the large decline in prices for vegetables, eggs and fruit. It was pointed out that, during Q3 as a whole, the annual inflation rate had nevertheless confirmed the upward expectations and that, in the absence of the transitory impact of lowering the standard VAT rate from 24 percent to 20 percent, it would have increased to 0.82 percent in September from 0.68 percent in June. Developments in inflation had been underpinned by both exogenous CPI components – such as fuel price dynamics, reflecting the renewed rise in oil prices, and higher tobacco product prices –, and core inflation.

Board members noted that the positive annual rate of adjusted CORE2 inflation had followed an uptrend during Q3, albeit slightly slower than forecasted. Board members took the view that, given the relative strengthening of the leu, affecting services prices in particular, these developments had been consistent with the increase in excess aggregate demand in Q2 and the further upward trend in the dynamics of industrial producer prices for the domestic market in some consumer goods sub-sectors. The arguments brought up were the consumer price rises for processed food items and non-food items, also hinting at a relative softening of disinflationary influences exerted by the external environment.

Looking at economic growth, Board members mentioned that it had exceeded expectations in Q2, due mainly to household consumption, as well as to gross fixed capital formation; on the other hand, net exports had increased their negative contribution to GDP growth. It was remarked that the latest developments pointed to economic growth slowing down in Q3, although remaining above potential, which implied the further widening of the positive output gap and hence the strengthening of the ensuing inflationary pressures. Relevance was attached, on one hand, to the decline in the positive dynamics of retail trade and in the volume of construction works July through August and, on the other hand, to the faster growth of industrial production against Q2 and the halt in the widening of the current account deficit; the latter had primarily been the result of larger EU fund inflows, which had offset the rise in the negative balance on trade in goods.

Board members expressed their concern over the tendency to deplete available workforce resources, increasingly signalled by specific indicators and relevant surveys. Moreover, it was noted that the annual growth rate of the average net wage economy-wide had remained in the two-digit range July through August, while that of unit wage costs in industry had advanced slightly to a two-digit average as well. It was also remarked that the potentially adverse effects of these developments – in terms of inflation/competitiveness – might be cushioned by companies’ current profit margins.

Board members started the discussions on the new medium-term forecast by pointing out that it broadly reconfirmed the coordinates of the previous inflation projection, after having witnessed significant downward revisions over two rounds. First, it was noted that the projected annual inflation rate trajectory would stay in negative territory until end-2016 and then below the variation band of the target in the early months of 2017, at values almost similar to those previously forecasted. Some Board members showed that these rates further stood below the levels anticipated over the short term in countries across the region and in the euro area. At the same time, it was highlighted that such values of the forecasted path were entirely or largely ascribable to recent and future cuts in indirect taxes.

Discussions also underscored the consolidation of the upward path that the projected inflation rate would embark on at the beginning of next year, with this indicator being expected to return inside the variation band of the target at mid-2017 and run in the upper half of the band at the end of the projection horizon. Moreover, Board members emphasised the slight upward revision of the anticipated pattern of core inflation, along with the further quasi-steady contribution of exogenous CPI components to the projected pick-up in inflation; mention was made that the upward trajectories forecasted for these components mainly reflected the base effects associated with the standard VAT rate cuts and the likely gradual reversal in the influence of global supply-side shocks, also amid the resumption of the uptrend in international commodity prices.

In the Board members’ opinion, the nature and intensity of the future action of supply-side factors continued, however, to be marked by uncertainty and to generate, over the short term, primarily disinflationary risks. Even if the latter materialised, the likelihood of a lasting impact on inflation expectations over the medium term was assessed to be low. Aside from the evolution of international oil and agri-food prices, developments in administered prices were also deemed relevant. As for the exchange rate of the domestic currency, Board members noted that it was surrounded by risks related mainly to global uncertainties, the monetary policy decisions to be taken by major central banks and by central banks in the region, and to the recently-adopted legislation in the specific domestic context. During the discussions, some members reiterated that the current corridor formed by interest rates on the NBR’s standing facilities was likely to provide increased flexibility to monetary policy.

Board members remarked that the uncertainties regarding the action of supply-side factors affected core inflation forecast as well, given that the prospects for a step-up in this inflation measure were underpinned, to a certain extent, by the presumed waning of indirect effects from global disinflationary shocks, alongside the fading-out of the transitory impact of standard VAT rate cuts. At the same time, it was pointed out that the key drivers behind the current upward path of the forecasted annual adjusted CORE2 inflation rate were the inflationary pressures anticipated to be exerted over the projection horizon by the cyclical position of the economy, as well as by unit wage costs and inflation expectations trending upwards.

In their analysis, Board members showed that the forecast on the wider opening of the positive output gap over the projection horizon relied on the faster-than-expected economic growth in 2016 H1, implying the early reversal of the cyclical position of the economy, and on the upward revision of the projected GDP dynamics for the second half of the year, as well as for 2017 and 2018; compared to the current year, economic growth was expected to decelerate over the medium term, while remaining above potential. Against this backdrop, it was highlighted that the pace of growth of Romania’s economy would probably be the fastest in the EU in 2016 and would continue afterwards to rank high in that hierarchy, including in the region. Some Board members pointed out that estimates on potential output and potential growth, as illustrated by international experience, needed additional empirical evidence.

It was noted that the major drivers of economic growth would further be the fiscal easing measures and pay rises, together with the accommodative real monetary conditions; references were also made to the favourable influences anticipated to come from the gradual recovery of the euro area economy, as well as to the recent weaker-than-expected adverse effects of the Law on debt discharge. In this context, some Board members voiced their concern over the prospects that the engine of economic growth would further be private consumption, primarily spurred by fiscal measures and increases in various types of household income. At the same time, other members remarked that a relatively larger contribution of investment to GDP dynamics was anticipated, partly due to favourable financial conditions and firms’ increased profit margins, conditional, however, on the pace of EU funds absorption and on that of public investment. It was also considered that the contribution of net exports would stay negative, albeit declining. It was underscored that keeping the balance-of-payments current account deficit at sustainable levels was of the essence. Against this background, a large part of the Board members reiterated the need for a balanced macroeconomic policy mix with a view to preventing slippages and consolidating the Romanian economy.

In the Board members’ opinion, the uncertainties associated with this picture continued to generate two-way risks to the inflation outlook. The members unanimously agreed that, in the context of this year’s end, the most significant were the uncertainties surrounding the building of the 2017 budget that would outline the future stance of the fiscal and income policies. Their relevance was increased, on one hand, by the characteristics of budget execution January through September 2016 and, on the other hand, by the multitude and nature of fiscal and wage measures initiated recently in the legislative area, whose materialisation was still uncertain. These measures referred to tax cuts, pay rises in the budgetary sector, and higher household income in the form of social benefits. It was shown that the implementation, be it even partial, of these measures would lead to an overheating of the economy and that the adverse effects might become manifest/strengthen over the medium and long term, especially if public investment were to be further postponed; the possible knock-on effects on external financing costs and on the leu exchange rate behaviour were also mentioned. Some Board members referred to the requirements under the Stability and Growth Pact and Romania’s commitments to comply with these requirements, as well as to other domestic legal provisions, considering that they diminished the probability of such a scenario to materialise. At the same time, some Board members mentioned the need for closer correlation of economic policy decisions in order to prevent adverse effects on the real convergence process.

In the Board members’ assessment, further important were also the uncertainties about the euro area economic recovery, fuelled mainly by the weakness of major emerging economies and the challenges facing the European banking sector, as well as by the uncertainties stemming from the outcome of the UK referendum. The latter were considered to become more relevant over the medium term, taking also into account that both the UK and the euro area economies had so far proved resilient to the Brexit vote, primarily due to the central banks’ monetary policy decisions. The ensuing downside risks to domestic inflation might materialise through both import prices and contractionary effects exerted on the cyclical position of the Romanian economy in the medium run.

In light of the analyses, Board members judged it appropriate to leave the monetary policy stance unchanged, with a view to ensuring price stability over the medium term in a manner conducive to achieving sustainable economic growth. Specifically, the NBR Board unanimously decided to keep the monetary policy rate at 1.75 percent; in addition, the Board unanimously decided to maintain at ±1.50 percentage points the symmetrical corridor of interest rates on the NBR’s standing facilities around the policy rate, to further pursue adequate liquidity management in the banking system, as well as to leave unchanged the minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.