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.
Looking at the recent inflation developments, Board members observed that the annual inflation rate had stood at 3.32 percent at end-2017, i.e. inside the ± 1 percentage point variation band of the 2.5 percent target. It had increased to 4.32 percent in January and 4.72 percent in February, significantly above the upper bound of the band, but slightly below the forecast. It was shown that behind the upward path had stood mainly supply-side factors and mention was made of the contributions from the base effects associated with cutting/scrapping of indirect taxes and non-tax fees and charges implemented in the same year-earlier period as well as from the recent hikes in the prices of electricity, natural gas and heating and the costlier fuels amid higher oil prices.
Board members also noted the contribution of fundamentals, given that the annual adjusted CORE2 inflation rate had risen faster even than the latest forecast to reach 2.9 percent in February from 2.4 percent in December. The evolution reflected a gradual build-up of both demand-pull and cost-push inflationary pressures, in the context of the economy’s advanced cyclical position and tight labour market conditions. Furthermore, reference was made to the influences of the EUR/RON exchange rate – mirrored particularly in the dynamics of services prices –, as well as to those likely arising from indirect effects of the hike in the prices of fuels and utilities, as hinted at by the further upward adjustment of short-term inflation expectations. The recent steepening posted by the upward trend in the annual growth rate of industrial producer prices of non-durables on the domestic market was also viewed as indicative of mounting inflationary pressures.
As for the cyclical position of the economy, Board members noted that the economic expansion had confirmed the expectations of a slowdown in 2017 Q4 – after having accelerated for four consecutive quarters –, its annual dynamics remaining, however, robust at 6.9 percent, in the context of the exceptionally high level of 8.8 percent in the previous quarter, which was a post-crisis peak. The rise had benefited from the strong support of household consumption, although on a decline compared to the previous interval, as well as from a larger contribution made by gross fixed capital formation, chiefly ascribable to a base effect on the public investment segment. Conversely, the negative contribution of net exports to GDP growth had increased, given that exports dynamics had posted a more pronounced deceleration than those of imports. On the supply side, the slowdown in economic growth had been driven solely by agriculture, whose value added had seen a sizeable quarter-on-quarter contraction, after the notable increases in the previous quarters. Board members concluded that, in light of the developments in Q4, the upward trend of excess aggregate demand was likely to continue while witnessing a relatively stronger moderation.
It was remarked that, in 2017 as a whole, economic growth had recorded the fastest post-crisis pace, its significant acceleration being, however, accompanied by the notable expansion of the current account and structural deficits.
Turning to labour market developments, Board members observed that the number of employees in the economy, while having continued to increase to a new post-crisis high in the first month of 2018, had posted a further slowdown in its annual dynamics. In turn, the ILO unemployment rate had remained stuck in January at the 4.6 percent historical low touched in December 2017 after the fall seen in 2017 Q4, concurrently, however, with a drop in the job vacancy rate for the second straight quarter. It was argued that the limited labour supply was likely to hinder the expansion of production but also boost its automation, mention being also made of the moderating employment prospects in 2018 Q2, as revealed by specialised surveys. It was concluded that the developments depicted a relative levelling off of labour market tightness, which remained, however, pronounced. At the same time, reference was made to the persistence of the high level, from a historical perspective, of the annual dynamics of the average gross nominal wage in 2017 Q4, which had probably moderated only slightly in January 2018 – according to the data adjusted for the effect arising from transferring the social contributions payable by the employer to the employee –, as well as to the deceleration seen over the past months by the annual dynamics of average net real wage earnings, mainly as a result of the pick-up in the annual inflation rate.
Following the discussions on financial market developments, Board members considered that, in 2018 Q1, monetary conditions had continued to be less accommodative. They underlined the slight increase in the average relevant money market rates compared to the previous three months, as well as the relative stability of the leu exchange rate in the second part of the interval, in the context of external influences together with the higher interest rate differential versus the prevailing levels in the EU and across the region. Board members also remarked the slightly larger spread between interest rates on new loans and those on new time deposits, partially reflecting a slower pass-through to the latter of the policy rate increase, probably also owing to the substantial liquidity surplus on the money market which was, however, largely transitory. The view held was that the pass-through to the market of the effects arising from the previous months’ monetary policy measures was still ongoing.
Board members also noted that the nominal annual growth rate of credit to the private sector had remained at the 2017 Q4 average level January through February, the advance being supported exclusively by the leu-denominated component, whose share in total credit had widened to 62.9 percent at end-February 2018. Some members observed that, during 2017 as a whole, the nominal dynamics of private sector credit, i.e. 5.6 percent, had stood below the annual pace of economic growth, with the degree of financial intermediation thus still diminishing. A caveat is, however, warranted when interpreting this evolution, namely that part of the economy is financed directly from abroad, in line with the logic of functioning of the single market.
Turning to future developments in the main macroeconomic indicators, Board members remarked that the new data and assessments showed the annual inflation rate could rise marginally and then level off above the variation band of the target over several months. It was noticed that the outlook was in line with the latest medium-term forecast, published in the February 2018 Inflation Report, which anticipated the subsequent decline and return of the annual inflation rate to the upper bound of the variation band towards the end of this year, followed by its gradual decrease in 2019 to 3.1 percent in December.
Some Board members underlined the transitory nature of the ongoing inflation bout, attributable to supply-side factors, whose effects would fade out starting with 2018 Q4. Notable influences were anticipated to be generated by hikes in electricity, natural gas and heating prices, as well as by fuel price dynamics, given higher oil prices and the reintroduction of the special excise duty on motor fuels. Significant influences would also come from expected developments in VFE prices, amid inter alia the recent adverse weather conditions, as well as from the rises in tobacco product prices. However, in that context, reference was also made to the risks induced by the uncertainties surrounding the future evolution of administered prices and volatile prices, considering that a potential materialisation of upside risks to the inflation outlook would rekindle the risk of de-anchoring inflation expectations over the medium term.
Board members then discussed the possible implications on the inflation outlook exerted by the new assessments on economic growth over the short time horizon. It was remarked that those assessments anticipated a further slowdown in economic expansion in the first half of 2018, which masked however a renewed step-up in its quarterly dynamics in Q1 followed by a marginal decline in Q2. In the members’ view, such an outlook, somewhat similar to the latest medium-term forecast, rendered likely a slight widening of the positive output gap in 2018 H1. Looking at the latest developments in high-frequency indicators, private consumption was anticipated to be the engine of economic growth, but also the major determinant of its deceleration in Q1. A positive contribution to GDP dynamics was also expected from gross fixed capital formation and possibly from general government consumption, amid inter alia the significant easing of the budget execution in the first months of 2018, compared with the same year-earlier period. Conversely, the negative contribution of net exports was expected to persist or even widen, given that the trade balance had remained on a worsening trend in January versus the same year-ago period.
It was argued that those assessments called for further adjustment of the monetary policy stance, potentially by resorting to other levers in addition to the monetary policy rate. Further arguments were the risks potentially generated by the fiscal policy stance and quality, as well as by developments in firms’ costs, also in the context of the high degree of labour market tightness, alongside the recent upward revisions of economic growth forecasts for 2018 in the euro area and the EU, but also globally, made by central banks and international financial institutions.
Board members agreed that – from the perspective of anchoring inflation expectations and maintaining the annual inflation rate on the trajectory shown by the NBR’s latest medium-term forecast, while safeguarding financial stability – of the essence were the dosage and pace of policy rate adjustment and the evolution of money market rates. It was considered that the current context warranted the maintenance of the existing level of the monetary policy rate. Discussions also touched upon the uncertain pace of recovery in investment this year – conditional inter alia on the carrying out of the programme for EU funds absorption –, as well as upon the new legislative initiatives regarding the banking sector, with a potentially adverse impact on lending and NPL resolution mechanisms, but also on monetary transmission, investor perception and the sovereign risk premium.
Looking at the external environment, reference was made to the persistence of low inflation in the euro area and other EU countries, the robust economic expansion notwithstanding, as well as to the likely monetary policy stances of major central banks; particularly relevant in terms of domestic financial market developments were considered the approach of the ECB and that of central banks in the region. Against that background, Board members reiterated the importance of a balanced macroeconomic policy mix, deemed essential also from the standpoint of avoiding the overburdening of monetary policy and preventing undesired effects across the economy. Mention was also made of the risks to the economic growth outlook in the euro area and globally stemming from the possible escalation of trade protectionism and from the developments, also against that backdrop, in prices of various financial asset classes and in the EUR/USD exchange rate.
Under the circumstances, the NBR Board unanimously decided to keep unchanged the monetary policy rate at 2.25 percent, the deposit facility rate at 1.25 percent and the lending (Lombard) facility rate at 3.25 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.