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 referred to recent inflation characteristics. It was shown that the annual inflation rate, which had risen to -0.2 percent in August 2016, was in line with the NBR projections, after having slipped to -0.78 percent in July from -0.7 percent in June. It was mentioned that its level had continued to be impacted by the transitory effects of lowering the standard VAT rate from 24 percent to 20 percent, in the absence of which annual inflation would have increased to 1.2 percent against 0.68 percent in June. In terms of the main CPI components, members remarked that the annual inflation rate remaining in negative territory had solely been attributed to a faster annual decline in administered prices and that in the opposite direction had acted volatile prices, whose annual dynamics had returned to positive territory, tobacco product prices, the positive annual growth of which had sped up, and a faster rate of adjusted CORE2 inflation.
Board members noted that the latter reflected to some extent the relative intensification of inflationary pressures from aggregate demand in 2016 Q2, as it had also captured the influence of the recent slight appreciation of the leu. At the same time, it was shown that stronger-than-previously-expected disinflationary effects may also have come, directly or indirectly, from the movements in consumer and producer prices in the euro area/EU, the behaviour of some global commodity prices, as well as from the Russia-imposed ban. Some Board members remarked that the persistence of disinflationary pressures may also have arisen from structural trends in world economy.
When discussing recent developments in the economy, Board members emphasised the faster than-expected second-quarter growth of 6 percent in annual terms, hinting at a stronger advance in excess aggregate demand, also in the short term. Furthermore, they highlighted that behind the faster economic growth had further stood consumer demand, boosted by higher household income, the fiscal measures in place, and favourable financial conditions. The larger contribution of gross fixed capital formation to GDP dynamics, especially on the back of investment in the private sector, was viewed as a positive evolution.
During the discussions, members underscored that net exports, however, had increased their negative contribution to growth. In this context, some Board members expressed their concern over the developments in the current account deficit, noting that it had almost doubled in 2016 Q2 – although remaining within sustainable limits –, after the significant widening of the negative balances on trade in goods and primary income. Other Board members pointed out, however, the slower increase in the external deficit in July, partly on the back of larger EU funds inflows, and the encouraging performance of foreign direct investment.
From the perspective of GDP formation, it was shown that the services sector had continued to make a prevailing contribution to the faster economic growth.
Board members remarked that the step-up in economic activity had been accompanied by a robust increase in the number of employees economy-wide and a fall in ILO unemployment rate to a post-crisis low, hinting at further labour market tightening. It was pointed out that the annual growth rate of the average net wage economy-wide had sped up April through July, due solely to a quicker pace of increase in the private sector. This had exceeded the 10 percent threshold for the first time in the post-crisis period, owing only partly to the May hike in the gross minimum wage. It was emphasised that, in 2016 Q2 as a whole, the annual growth rate of unit wage costs in industry had remained as elevated as in the previous quarter. Nevertheless, some Board members also noted the significant improvement in labour productivity dynamics in 2016 Q2, which had fully offset the step-up in wage growth across the industrial sector; at the same time, they considered that the jump in unit wage costs seen in July widely reflected a calendar effect, which would probably entail a corrective move in the course of 2016 Q3.
Turning to real monetary conditions, Board members took the view that they had remained stimulative in 2016 Q3, given that both interbank money market rates – which were lower than in other countries across the region – and the leu exchange rate had tended to fall and subsequently stayed at levels slightly below those seen in the previous period. It was concluded that the developments had emerged against the background of adequate liquidity management in the banking system and improving international financial market sentiment, mostly following the signals conveyed and the decisions taken by major central banks after the Brexit vote.
In this context, Board members noted that in the first months of 2016 Q3 private sector credit had continued to grow in real annual terms, albeit at a slower pace than in the previous period, due to the clean-up of banks’ balance sheets via non-performing loan sales and to the statistical effect of the pick-up in the annual inflation rate. All members agreed that the tightening of credit standards on housing loans in 2016 Q2 seemed to have had a modest impact on the flow of new business so far, with the caveat that available data were yet insufficient for a comprehensive assessment thereof.
Board members also pointed out the persistence of the gap between the positive dynamics of leu-denominated loans and the negative rate of change of the forex component, as well as the widening share of domestic currency loans in total credit to the private sector, to 55.9 percent in August, which confirmed the improvement in monetary policy transmission and helped mitigate the risks to financial stability and enhance the robustness of the economy. The unanimous opinion was that this trend was significant for the path followed by the Romanian economy towards strengthening its resilience to global financial market shocks.
Board members looked at the monetisation of the economy as well. It was noted that broad money had further recorded two-digit growth rates during the first months of 2016 Q3, largely underpinned by its most liquid component, narrow money, whose performance had been correlated with the economic growth and the low opportunity cost of holding more liquid monetary assets.
The discussions on the future developments in inflation showed that the current short-term forecast reconfirmed the outlook for the annual inflation rate to remain in negative territory until end-2016, amid the transitory effects of the standard VAT rate cut still being manifest. They were more visibly reflected by the annual dynamics of administered prices and fuel prices, anticipated to further post negative values in the following months; by contrast, positive annual adjusted CORE2 inflation and VFE price dynamics were expected to gain momentum. The near-term outlook for inflation was compatible with its latest medium-term forecast, which saw the annual inflation rate returning into positive territory and thereafter inside the variation band of the flat target during 2017, before standing in the upper half of the band at the beginning of 2018, amid the fading out of the effects exerted by the standard VAT rate cuts and by global disinflationary shocks, along with inflationary pressures from aggregate demand and unit wage costs. Some Board members remarked that significant disinflationary pressures in the global economy could affect the actual dynamics of inflation.
In the Board members’ opinion, the uncertainties and risks to the current inflation outlook generated by supply-side factors were further significant, without however affecting medium-term inflation expectations in a lasting manner. It was considered that, over the short term, especially relevant was the uncertainty surrounding the outlook for the oil price, and for VFE prices in particular, given the EU-wide measures to limit the effects of the Russia-imposed ban and the recent uptrend in global agri-food commodity prices, on one hand, and the potentially stronger-than-expected rise in the domestic supply of such goods, on the other hand. Moreover, the Board members reiterated the uncertainty associated with future inflation developments, stemming from the two-way risks to the exchange rate of the leu induced by the external and domestic environments. These risks related to the monetary policy decisions of the major central banks and of the central banks in the region, to developments in emerging economies, as well as to the domestic context and the fiscal and income policy stance. Against this backdrop, some members mentioned that the current corridor formed by interest rates on the NBR’s standing facilities was likely to provide increased flexibility to monetary policy.
As regards the influence of fundamentals, Board members noted the upward adjustment of the pace of economic growth anticipated for 2016 Q3, amid the recent economic and financial developments both domestically and abroad, implying over the short term a larger-than-expected widening of the positive output gap and hence strengthening of the ensuing inflationary pressures. Looking also at the performance of high-frequency indicators, consumer demand was expected to be the main driver of economic growth in 2016 Q3 too, whereas the contribution of investment was seen as positive, yet muted, and that of net exports as still negative. In their analyses, a large part of the Board members were of the opinion that developments in economic growth warranted close scrutiny in terms of potential risks of overheating, although it was pointed out that no such signs had been visible yet. In the same vein, the discussions emphasised the need for a balanced macroeconomic policy mix with a view to consolidating the domestic economy.
Board members highlighted the ongoing dual nature of the key uncertainties about developments in inflation fundamentals. Particular relevance was attributed to the unfavourable effects that could be exerted on the euro area/EU economic recovery by the outcome of the UK referendum, by developments in the European banking system and in major emerging economies, as well as by geopolitical tensions. Moreover, the Board remarked the lingering uncertainty surrounding the magnitude of effects stemming from the Law on debt discharge and from other legislative initiatives regarding the banking sector. Discussions pinpointed an anticipated easing of the fiscal and income policies in the period ahead, given the budget execution for January-August 2016. The heightened uncertainty about the longer-term stance of these policies was also noted. Against this background, Board members reiterated their concern about the uneven pace of public investment and structural reforms, likely to affect the growth potential and competitiveness of the domestic economy.
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 requirements ratio on leu-denominated liabilities of credit institutions.
As for the level of the minimum reserve requirements ratio on foreign currency-denominated liabilities of credit institutions, given the contraction in foreign currency lending, the consolidation of forex reserves above the adequate level in the recent period and in the period ahead, as well as their improved composition, the NBR Board unanimously decided to cut the minimum reserve requirements ratio on foreign exchange-denominated liabilities of credit institutions to 10 percent from 12 percent starting with the 24 October - 23 November 2016 maintenance period. The measure aimed to continue the harmonisation of the minimum reserve requirements mechanism with the relevant standards and practices of the European Central Bank and the major central banks across the European Union.