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 the recent characteristics and the updated forecast of medium-term macroeconomic developments submitted by the specialised departments, as well as on other available domestic and external information.
During the discussions on the recent dynamics of consumer prices, Board members showed that the annual inflation rate had moved deeper into the variation band of the flat target in the last month of 2018, falling to 3.27 percent from 3.43 percent in November, and that its wide downward correction in the course of Q4 had thus slightly exceeded expectations. As foreseen, the decrease from the 5.03 percent level seen in September had been mainly the result of the disinflationary base effects that had markedly affected the dynamics of volatile and administered prices, to which had added the influences arising from the drop in fuel prices and prices of fruit and vegetables.
It was noted that core inflation had also continued to make a contribution in the context of the annual adjusted CORE2 inflation rate posting a decline from 2.8 percent in September to 2.5 percent in December, i.e. a value similar to the anticipated level. The decrease had owed once again mostly to processed food items and, to some extent, to services, being therefore attributable to the base effects associated with developments in the prices of some agri-food items and the relative strengthening of the leu against the euro, as well as to some possible indirect effects of the oil price decline, according to some Board members.
However, the growth rate of non-food items had posted further an opposite movement, peaking at a 7-year high in October-December 2018. Board members deemed that the non-food component illustrated more accurately the inflationary pressures associated with the path of excess aggregate demand and the dynamics of unit labour costs, as well as with the only slightly lower level of the recently reported short-term inflation expectations. The increase in GDP deflator in 2018 Q3, shown by the new statistical data, was also seen as indicative, while reference was made, at the same time, to the slight moderation of the annual growth rate of industrial producer prices for consumer goods on the domestic market in the first two months of Q4.
As for the cyclical position of the economy, Board members noted that the second provisional version of statistical data confirmed the further acceleration in economic growth in 2018 Q3, especially in quarterly terms, solely on account of agricultural output increasing significantly above expectations, an evolution involving a halt in the upward path of the sizeable excess aggregate demand in that interval and its positioning marginally below the anticipated value. The prevalent contribution from the change in inventories to the GDP advance was also reconfirmed, followed by household consumption, with increased support from self-consumption, the contribution of which was, nonetheless, slightly revised downwards in favour of general government consumption. The negative contribution of net exports to GDP dynamics had, however, increased, reflecting a relatively more pronounced slowdown in the growth rate of exports of goods and services than in that of imports, which alongside the worsening of the primary and secondary income balances had caused a faster widening of the current account deficit.
Board members agreed thereafter that the latest assessments continued to indicate a quasi-stable annual economic growth rate in 2018 Q4, before accelerating slightly in 2019 Q1, corresponding to a marked moderation of the GDP quarterly dynamics in the said period, including when compared to the previous forecasts. It was deemed that the slowdown seen in the last quarter of the previous year was, however, entirely ascribable to the potential contraction in the agricultural production after the outstanding performance reported in the earlier months, which made it likely for the positive output gap to resume its widening in the two quarters, albeit to slightly lower values than previously expected. However, the high uncertainties about the dynamics of economic activity in 2019 Q1 were repeatedly underlined, in the context of the new set of fiscal and budgetary measures coming into force.
According to Board members’ assessment, based on the latest relevant developments, private consumption had probably become again the key driver of economic growth in 2018 Q4. By contrast, a higher negative contribution could have come from gross fixed capital formation and especially net exports amid a step-up in the annual growth of imports of goods in October-November, alongside a slowdown in the dynamics of exports. In that context, many Board members expressed their increased concerns about the unfavourable developments in investment and particularly about the faster widening of current account deficit, whose share in GDP had probably risen significantly in 2018 compared to 3.2 percent in 2017, in parallel with the decrease in its coverage by foreign direct investment and capital transfers; mention was made that a likely expansion in the deficit to more than 4 percent of GDP called for closer attention.
Board members also voiced concerns over the high degree of labour market tightness, which had probably remained in 2018 Q4 close to the post-crisis peak seen in the previous quarter, given that the unemployment rate had continued to fall to a new historical low of 3.8 percent in December; at the same time, the number of employees economy-wide had reached new highs, while its annual growth had recorded a new step-up in November, for the first time in a year and a half. Labour market tightness and implicitly wage pressures were deemed to remain particularly elevated in the short run, in the context of the robust employment intentions pointed out by the latest surveys for 2019 Q1 and the beginning of Q2, as well as of the high emigration and the skill mismatch. It was noted that in the first two months of 2018 Q4 as a whole, the dynamics of the average gross nominal wage earnings had gained new momentum, the same as those of average net real wage earnings, which had touched a four quarter-high, inter alia with the contribution from the slowdown in the annual inflation rate; at the same time, the growth rate of unit wage costs in industry had reported only a marginal decline versus the previous quarter’s average.
Relative to monetary conditions, Board members remarked the return of the key interbank money market rates and their positive spread vis-à-vis the monetary policy rate to a slightly upward path in mid-January 2019, also in line with the movements seen on other segments of the domestic financial market during that period. Mention was also made of the more pronounced increase in the leu’s exchange rate in the latter part of January in the context of the deterioration of the external position of the economy, which had, nonetheless, tended towards a slight correction later on, including under the impact of a revival in the global appetite for risk. Board members agreed that the risk potential of the domestic context remained high, especially in the event of a potential sudden change in the global financial market sentiment or in the risk perception vis-à-vis the local economy/financial market.
It was observed that the annual growth rate of credit to the private sector had accelerated in December 2018 to 7.9 percent, the highest reading for the past approximately six and a half years, while its Q4 average had exceeded that recorded in the previous three months. Behind the advance had stood mainly the leu-denominated component, whose share in total private sector credit had peaked at a 66 percent high since September 1996. Some members pointed out that the level of private sector credit was, however, further low relative to economic activity.
During the discussions regarding future developments, Board members showed that the new anticipated pattern of inflation was quasi-similar to that indicated by the forecast published in the November 2018 Inflation Report. Specifically, the annual inflation rate would probably decline further during the first three quarters, to values even slightly below the previously expected ones, before climbing and remaining on a higher path, yet beneath the upper bound of the target band, to reach 3.0 percent in December 2019 and 3.1 percent at the end of the forecast horizon, i.e. almost identical to the previously forecasted levels.
It was noted that the protracted slowdown in the annual inflation rate over the short time horizon was presumably driven by supply-side factors, especially by the anticipated declines in fuel and VFE price dynamics, as well as by the likely slight deceleration in the growth rate of administered prices. At the same time, it was agreed that the outlook for the exogenous CPI components was highly uncertain, with some members even expressing the opinion that developments in the prices of some services and utilities – including electricity and natural gas – would turn inflationary again in the near run, as a result of the fiscal and budgetary measures effective 1 January 2019. It was deemed that larger-than-expected price increases were also possible in the case of some agri-food items, as well as of fuels, closely reflecting the movements in oil prices.
Moreover, Board members observed that, after a short standstill, the annual dynamics of core inflation were foreseen to regain momentum in 2019 Q2 and climb thereafter to 3.3 percent in December 2019 and to 3.4 percent at the end of the forecast horizon – marginally above the previously anticipated values – amid simultaneous, gradually rising inflationary pressures projected to stem from the cyclical position of the economy, short-term inflation expectations and import prices. It was pointed out that the positive output gap would likely widen further until 2020 Q1 on a path only slightly lower than envisaged earlier, given that the adverse effects of the recently implemented fiscal measures were expected to feed through to potential GDP as well. Furthermore, the dynamics of import prices were anticipated to be relatively faster in 2019, inter alia against the background of the likely developments in the leu’s exchange rate.
As regards the prospects for the cyclical position of the economy, Board members remarked that the outlook for economic activity witnessed a change in the current context, its annual rate of growth being expected to further decelerate gradually across the forecast horizon, while remaining above and then in line with the potential rate. It was shown that a major source of change consisted in the impact presumably stemming from the fiscal and budgetary measures implemented in 2019, anticipated to be felt as a supply-side shock as well. At that point, discussions also touched upon the influence of a slower economic activity in Europe and trade tensions.
It was observed that, under those circumstances, the dynamics of investment – primarily affected – were expected to post a modest recovery, even running the risk of a protracted decline, especially assuming a contraction in investment in the public sector and in the case of state-owned enterprises, which would imply stronger adverse effects on the economy’s domestic and external equilibria. Board members reiterated that a lasting recovery of investment, essential for consolidating the economy’s growth potential, was also conditional on fiscal and legislative framework predictability, with an impact on resident and non-resident investor confidence as well. It was remarked that household consumption – anticipated to consolidate its role as the main driver of economic expansion across the forecast horizon – might also be affected by the package of fiscal measures, via the dynamics of real disposable income and consumer confidence, but also via the availability and cost of bank loans.
Discussing the implications of the tax on credit institutions’ financial assets, Board members voiced again concerns about the manner of setting the tax, reiterating that linking that tax to benchmark rates on the interbank money market – such as 3M and 6M ROBOR – actually meant linking it to the monetary policy stance, and therefore it was of the essence for GEO 114 to abandon that approach. It was underlined that the independence of monetary policy instruments, as part of the NBR’s statutory independence, was crucial for fulfilling the price stability mandate. Moreover, it was shown again that the adverse effects of the tax might be compounded by those of the recently approved legislative initiatives on the banking sector, whose provisions were likely to affect lending and monetary transmission, but also banks’ stability, as well as the economy’s external financing costs.
Board members concluded that the cumulated effects of those measures were difficult to assess at the current stage, considering a series of ambiguities and the multitude of transmission channels in the economy, conducive to a heightened degree of uncertainty surrounding the current forecast.
It was shown that elevated uncertainties were also associated with the future fiscal and income policy stance, given the still pending 2019 draft budget; at the same time, it was observed that the current outlook for economic growth implied a quasi-neutral policy stance in 2019, followed however by the return to a pro-cyclical stance in 2020, due mainly to the provisions of the pensions law being enforced as of the autumn of 2019. The outlook also assumed a slower reduction in the degree of accommodation of monetary conditions, but also a more visible deceleration in the economic growth in the euro area/EU and globally. In some Board members’ opinion, the slowdown on the external front might, however, be even more pronounced, given the heightened risks stemming from the trade row and the unfolding of Brexit, as well as from geopolitical tensions and international financial market volatility. Reference was also made to the monetary policy stance of the ECB and of other major central banks, and to the probable stance of central banks in the region.
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, the importance of an adequate dosage and pace of adjustment of the monetary policy stance was reiterated, from the perspective of anchoring inflation expectations and maintaining the annual inflation rate on the trajectory shown by the NBR’s 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.