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.
In their addresses, Board members first examined the recent inflation developments. It was noted that the annual inflation rate had resumed an upward path in Q2, after having stood flat at 0.18 percent in March, reaching a slightly higher-than-projected 0.64 percent in May. In the absence of the transitory effects associated with the standard VAT rate cut to 19 percent, the annual inflation rate would have climbed to 0.96 percent. The increase had been driven mostly by developments in core inflation and administered prices, with a much lower contribution from prices of vegetables, fruit and eggs. Opposite influences had exerted the slower annual fuel price dynamics, reflecting developments in the international oil price.
Board members found that adjusted CORE2 inflation had risen above the projected level as well, with its annual rate going up to 1.29 percent in May from 1.03 percent in March, largely on the back of higher processed food prices; in the absence of the standard VAT rate cut, it would have climbed to 1.47 percent. It was assessed that developments pointed to the build-up of inflationary pressures from fundamentals, especially those generated by the cyclical position of the economy and by unit labour costs. However, those pressures continued to be countered by direct and indirect disinflationary effects, probably stemming from heightened competition in various market segments that are representative for the CPI basket and from the dynamics of some international commodity prices, oil price in particular, coupled with the increased volume of imports.
Some Board members referred to a disinflationary factor that had been recently mentioned by the European Central Bank and the Bank for International Settlements as well, namely the weakening of the transmission mechanism between industrial producer prices and consumer prices. This seemed to be brought about by the presence of global value chains, and of large retailers in particular, which internalised part of the rises in industrial producer prices, increases in labour costs included, no longer passing them on to the final price.
Board members underscored that economic growth had sped up significantly in 2017 Q1, also against the latest medium-term forecast, to 5.7 percent in annual terms from 4.8 percent in 2016 Q4, which implied a wider opening of the positive output gap. It was noted that the pick-up in dynamics had been fully ascribable that time to domestic demand, whose faster growth had been driven both by household consumption – spurred by the new fiscal and wage measures – and by gross fixed capital formation, primarily underpinned by residential construction works and, to a lower extent, by equipment purchases. Conversely, the contribution of net exports to GDP growth had slipped marginally back into negative territory, as the step-up to a three-year high in the dynamics of exports of goods and services, amid the rebound in external demand, had been exceeded by the pick-up in the pace of increase of imports, largely due to the integration of certain industrial segments in the global value chains. Against this background, as well as following the unfavourable evolution of the primary and secondary income balances, the current account deficit had witnessed a steeper widening trend compared with the same year-earlier period – without however being worrisome. It was observed that, in correlation with the performance of exports, the largest contributor on the supply side to the step-up in GDP growth had been industrial output, whose annual dynamics had peaked at a 12-quarter high. By contrast, services had recorded a slight loss of momentum, although the prevailing share of this sector’s gross value added in GDP had further consolidated, thus reaching a historical high.
Board members then looked at developments in the labour market. It was pointed out that the number of employees economy-wide had continued to grow March through April, while the unemployment rate had remained at a historical low, before edging up slightly in May. Concerns were voiced over the labour market tightening trend, amid the marginal rise in the job vacancy rate. The uptrend might extend into the period ahead, given the positive employment prospects, as well as the increased difficulties in hiring skilled workforce – as indicated by relevant surveys –, especially for companies whose production process undergoes automation/modernisation. Reference was also made to the implications on potential GDP and hence on economic growth sustainability of mismatches between performance requirements in industrial and service activities and the qualification of staff. Moreover, it was noted that in April the annual dynamics of average gross wage earnings had stuck to a two-digit level, the slight deceleration versus Q1 notwithstanding, while the annual pace of increase of unit wage costs industry-wide had regained substantial momentum, amid the – possibly one-off – decline in the annual rate of change of labour productivity.
Board members discussed the real monetary conditions, which were deemed to have retained their stimulative nature in 2017 Q2, against the backdrop of the rise in the EUR/RON exchange rate and in the annual inflation rate, along with the slight reduction in the average remuneration of time deposits, as well as with the relative increase in the average lending rate on new business. Under the circumstances, mention was made that the annual dynamics of credit to the private sector had remained on an upward trend in April, before staying put in May, under the joint impact of a slight deceleration in the growth rate of credit to non-financial corporations and the renewed pick-up in the pace of increase of loans to households, attributable to consumer credit and other loans. Board members also noted the uptrend in the share of leu-denominated credit in total private sector loans, which had widened to 59.3 percent in May, 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. Some Board members underscored that both monetary conditions and the fiscal policy measures were stimulative.
Looking at the likely future developments in the main macroeconomic indicators, Board members noted that the new near-term forecast reconfirmed the outlook for a further rise in the inflation rate in the following months. It was pointed out that, in the near future, the annual inflation rate would probably remain on a slightly higher path than that in the NBR’s latest medium-term forecast published in the May 2017 Inflation Report, given expectations of a relatively faster rise in core inflation, as well as in administered prices, only partly counterbalanced by slower dynamics of the international oil price. Reference was also made to the coordinates and determinants of the NBR’s most recent medium-term forecast; according to it, the annual inflation rate was projected to return inside the variation band of the flat target in 2017 Q4, to increase to 3.1 percent in December 2018 and to climb close to the upper bound of the band in March 2019 amid the fading-out of one-off effects from scrapping indirect taxes, excise duties and non-tax fees and charges and against the backdrop of increasing inflationary pressures from aggregate demand and unit wage costs.
From that perspective, Board members also attached particular importance to the new assessments of short-term economic growth that revealed a significant upward revision of the quarterly GDP dynamics forecast for Q2 and only a marginal downward revision of the forecast for Q3, entailing a considerably wider positive output gap in the near term, given, inter alia, the acceleration way above expectations in the economic growth in Q1. It was noted that, compared to 2017 Q1, economic growth was, however, expected to decelerate in the period considered by the near-term forecast, yet to a markedly lower extent than in the latest medium-term forecast. It was shown that the recent developments in high-frequency indicators pointed to private consumption as the sole driver of robust economic growth in Q2, with the contributions from the other aggregate demand components being foreseen to stay or turn negative.
Board members observed that upside risks to the NBR’s most recent medium-term forecast stemmed also from the upward revision of euro area and EU economic growth projections by central banks and international financial institutions. Adding to that was the recent relative balancing of risks to the economic growth outlook for the euro area, also in the context of the mitigation of some of the problems facing the banking system and of the political risks in the euro area, as well as amid the strengthening of global economic recovery and the revival of international trade.
At the same time, Board members remarked, however, a significant increase in the uncertainties about the short- and medium-term outlook for the fiscal and income policy stance, likely to generate enhanced uncertainties and two-way risks to the latest medium-term inflation forecast. Those stemmed, on the one hand, from the recently promulgated unified wage law - the enforcement of which was, however, hard to predict, given its being conditional upon the fulfilment of certain requirements -, and, on the other hand, from the new measures and legislative initiatives announced in respect of taxation, of wages and pensions, as well as of the functioning framework for firms, with potential implications on the nature of fiscal policy and on the fiscal impulse, as well as on companies’ and households’ confidence and incomes, and therefore on the investment and consumption behaviour. The multitude of uncertainties and the absence of insight on the concrete measures and the implementation calendar made it impossible as yet to assess the potential macroeconomic and structural effects.
Some Board members also referred to the set of measures that would likely accompany the implementation of the unified wage law, designed to alleviate its expansionary effects, while also mentioning the possible adoption of corrective fiscal measures in the context of the forthcoming budget revision, with a view to ensuring compliance of the 2017 fiscal deficit with the 3 percent-of-GDP reference value. Some Board members remarked that, in the absence of compensation measures, keeping the budget deficit below 3 percent of GDP would pose greater problems in 2018. Moreover, it was pointed out that the markedly lower-than-expected rate of absorption of EU structural and investment funds under the 2014-2020 financial framework would likely continue, at least in the near future.
Some members also mentioned the downside risks to the domestic inflation outlook induced by the recent slightly downward revision of medium-term inflation forecast for the euro area, as well as by the effects stemming from the globalisation of production chains worldwide. It was shown that, according to ECB assessments, the further slow dynamics of euro area inflation reflected the effects generated, inter alia, by global shocks, mainly by the oil price evolution, the changes on the labour market, also following structural reforms, as well as by the influence of previously low inflation on inflation expectations, including wage setting; the behaviour of large store chains must probably have played a significant part too. Reference was also made to the uncertainties arising from Brexit talks and the economic policies pursued by the US Administration, likely to induce downside risks to economic growth in the euro area/EU and worldwide, and implicitly on the domestic front. Some Board members deemed that in the medium term there were no factors likely to cause shocks to consumer prices, especially ahead of an expected good agricultural year. In addition, Board members discussed the potential influences exerted by major central banks’ monetary policy stance on the local financial market, and therefore on the exchange rate of the leu, also in the present and future economic and financial context in the region. Under the circumstances, several Board members underlined the need for a balanced macroeconomic policy mix with a view to safeguarding macroeconomic stability.
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 per annum; 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.