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 current and expected macroeconomic, financial and monetary developments submitted by the specialised departments and other available domestic and external information.
In their addresses, Board members first referred to recent inflation developments. It was noted that the annual inflation rate had slipped in November to -0.67 percent, slightly below the forecasted level, after having picked up to -0.43 percent in the previous month (from -0.57 percent in September), in line with projections. The participants pointed out that this had been exclusively attributable to supply-side factors, the largest contributors being the slower annual dynamics of tobacco product prices and the price cuts for compulsory motor third-party liability insurance policies.
Board members remarked that the latter exerted a transitory impact on core inflation as well, acting as the main driver of the decline in the annual rate of adjusted CORE2 inflation slightly below the September reading, and hence below the anticipated level, while demand-pull inflationary pressures had presumably remained unchanged during Q3 and the leu exchange rate had witnessed a relative increase in Q4.
When discussing recent developments in the economic activity, Board members pointed out the stronger-than-forecasted slowdown in third-quarter growth – with annual GDP dynamics decelerating to 4.4 percent from 6 percent in Q2 –, entailing a likely halt in the advance of excess aggregate demand during that period, contrary to expectations. It was noted that both major components of domestic demand had contributed to the loss of momentum in economic activity, with the performance of investments being correlated with the reduction in the volume of construction works in the public sector, after the strong pick-up in Q2.
A relevant aspect in this context was deemed to be the considerable reduction in the negative contribution of net exports to annual GDP dynamics, given the much sharper decline in the growth rate of imports compared with that of exports of goods and services. Some Board members remarked that in Q3 the balance on trade in goods had worsened at a slower pace than in the first half of 2016 and that the goods deficit had further been largely offset by the surplus under services.
From the perspective of GDP formation, it was noted that the slowdown in economic growth had been due to all major economic sectors, as well as to net taxes on products. At the same time, it was highlighted that services had become again the fastest-growing sector in Q3, further making the largest contribution to annual GDP dynamics.
Some Board members pointed out that, even though economic growth in 2015 and 2016 had been relatively fast and primarily consumption-driven, it had not led to a worrying widening of the current account deficit. One of the considered explanations referred to the fact that, looking at the breakdown, the rise in domestic demand had been partly accommodated by domestic production.
Board members noted that the number of employees economy-wide had continued to increase at the relatively robust pace seen a quarter earlier, while the unemployment rate had fallen by another 0.2 percentage points to a new post-crisis low. Moreover, mention was made of the findings of recent surveys in the field, pointing to significant rises in employment intentions in 2017 Q1. Against this background, Board members expressed their concern over the more visible labour market tightening trend under the influence of cyclical factors, compounded by the structural rigidities in this market. It was shown that the annual growth rate of the average net wage economy-wide had witnessed only a very slight slowdown September through October, sticking to two-digit levels, whereas the annual pace of increase of unit wage costs in industry had posted a renewed pick-up in October, after the relative deceleration seen in the previous two months.
Turning to real monetary conditions, Board members took the view that they had remained stimulative in 2016 Q4, amid the ongoing decline in interest rates on new loans and new time deposits, as well as the relatively higher readings of both EUR/RON and USD/RON exchange rates – exerting two-way effects, albeit of variable magnitudes, on the dynamics of economic activity.
In this context, Board members noted that, in the first two months of 2016 Q4, private sector credit had continued to grow, this time mainly due to the performance of loans to non-financial corporations. Furthermore, it was shown that, given the advance in the leu-denominated component and the decline in foreign currency-denominated loans, the share of domestic currency credit in total private sector loans had continued to widen (to 56.9 percent in November), thus certifying the improvement in monetary policy transmission, while also helping mitigate risks to financial stability and enhance the robustness of the economy in general.
The discussions on the future developments in inflation underscored that the current short-term forecast reconfirmed the outlook for the annual inflation rate to re-enter positive territory in 2017 Q1, along with resuming an upward course, owing to the fading out of the transitory effect of the standard VAT rate cut to 20 percent and to inflationary pressures exerted by aggregate demand and unit wage costs. However, the annual inflation rate was expected to stand lower than the level projected in the latest medium-term forecast, published in the November 2016 Inflation Report, under the conditions of no changes in the envisaged magnitude of effects exerted starting 1 January 2017 by the new cut in the standard VAT rate and by the removal of the special excise duty on fuels. Mention was made that the latest medium-term forecast saw the annual inflation rate returning inside the variation band of the flat target at mid-2017, before climbing in the upper half of the band as of 2018 Q1.
It was noted that all exogenous CPI components, except for fuel prices, contributed to the downward revision of the short-term inflation outlook, their lower dynamics also reflecting the cut in electricity price on 1 January 2017, as announced towards end-2016. At the same time, it was pointed out that a major contribution came from core inflation, whose outlook saw a significant downward adjustment on the near-term horizon, only partly ascribable to the action of fundamentals.
Against this backdrop, Board members showed that the new short-term forecast pinpointed a slight step-up in GDP quarterly growth in 2016 Q4, including when compared with the latest medium-term forecast, followed by a relative loss of momentum, implying – amid a faster-than-anticipated deceleration in economic growth during 2016 Q3 – a relative slowdown in the widening of the positive output gap and in the strengthening of the ensuing inflationary pressures over the short term. It was remarked that the recent performance of high-frequency indicators, the general government budget deficit included, hinted at notable contributions to fourth-quarter economic growth from both consumer demand and investment.
However, the assessment made by Board members also revealed prevailing upside risks to the short-term forecast, related to post-election developments, with implications on the longer-term inflation outlook. It was assessed that risks to the inflation outlook could be compounded over the medium term by the potential ongoing sluggishness of public investment and structural reforms, likely to affect the domestic economy’s growth potential and to determine – alongside the prevailing consumption stimuli – a larger opening of the positive output gap and current account deficit in the period ahead.
Some Board members also highlighted a relative improvement seen recently in the balance of risks to euro area/EU economic growth, at least partly attributable to the decisions taken by the ECB and the Bank of England, as well as to the weaker euro and pound sterling. References were also made to the recent more favourable performance of China’s economy and to the slight improvement in the prospects of emerging economies, commodity-exporting ones in particular, amid the rebound in demand for commodities and/or in the international prices thereof, fuelled by the anticipated US fiscal stimulus. On the other hand, it was stressed that the EU was facing high political uncertainties, which could affect economic developments in these countries.
Members also mentioned the risk of indirect inflationary effects of the uptrend in international energy commodity prices becoming manifest, especially amid high wage costs, a possible hint being the upward trajectory of the dynamics of industrial producer prices on the domestic market. The uncertainty surrounding future developments in international oil prices was emphasised as well, also in light of the OPEC and some non-OPEC producers’ agreement on a coordinated cut in production in 2017 H1.
At the same time, Board members also noted the persistence of downside risks to euro area economic growth, given the uncertainties associated with the 2017 election calendar and with the Brexit negotiations, as well as the challenges to the European banking system. As concerns domestic developments, these risks were deemed more relevant over the medium-term horizon.
Concern was also voiced in relation to the potential absorption rate of EU funds under the new Multiannual Financial Framework, entailing in turn downside risks to the outlook for domestic economic growth. Moreover, the unanimous opinion was that fiscal and income policy prospects remained uncertain until the 2016 budget execution features were released and, more importantly, the 2017 budget construction that would outline the future stance of the two policies became available. In this context, some Board members reiterated the requirements under the Stability and Growth Pact and Romania’s commitments to comply with these requirements, as well as other domestic legal provisions, considered as genuine constraints to a more pronounced loosening of the fiscal policy. Furthermore, mention was made of the finance minister’s statement that the 3 percent reference value for the general government deficit-to-GDP ratio would not be exceeded in 2017.
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.