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; Leonardo Badea, Board member and Deputy Governor of the National Bank of Romania; Eugen Nicolăescu, Board member and Deputy Governor of the National Bank of Romania; Csaba Bálint, Board member; Gheorghe Gherghina, Board member; Cristian Popa, Board member; and Dan-Radu Rușanu, Board member.
During the meeting, the Board discussed and adopted the monetary policy decision, based on the data on and analyses of the recent characteristics and the updated medium-term forecast of macroeconomic developments submitted by the specialised departments, as well as on other available domestic and external information.
Looking at the recent developments in consumer prices, Board members showed that, in December 2019, the annual inflation rate had continued to rise to 4.0 percent from 3.8 percent in November, thus running slightly higher than expected above the variation band of the target. It was noted that the upward movement in the inflation dynamics in 2019 Q4 had owed mainly to the larger change in fuel prices, inter alia amid a base effect, but also to the considerable hike in fruit prices, as well as to the acceleration in core inflation.
It was remarked that the annual adjusted CORE2 inflation rate had unexpectedly regained momentum in 2019 Q4, also exceeding the upper bound of the variation band of the target – to 3.7 percent in December from 3.4 percent in September – the slight disinflation in the non-food sub-component (probably owing to season sales) notwithstanding. Thus, the acceleration had come almost entirely from processed food items – given the significant rise in the pork price and the hikes in other prices sensitive to movements in international prices. Yet, some Board members remarked that upward trends had also been manifest across some categories of services relevant for demand pressures, their impact being however almost offset by a few atypical, possibly incidental, price cuts in spite of the mild depreciation of the leu against the euro.
It was deemed that the evolution of core inflation continued to indicate significant inflationary pressures from fundamentals, in line with the size, trend and determinants of the cyclical position of the economy, as well as with labour cost dynamics. Reference was made, in that context, to the two-digit annual growth recorded by unit wage costs in industry during 2019, as well as to its ongoing upward trend, which had continued into 2019 Q4 amid the persistent deterioration in labour productivity. Board members considered those developments to be reasons for concern, in view of, inter alia, the implications for the competitiveness of some sub-sectors. At the same time, it was shown that economy-wide average gross nominal wage earnings, as well as net real wage earnings had further displayed two-digit annual increases over the last months, only marginally slower than in the previous quarter. Board members shared the view that pressures on wages would remain relatively elevated in the forthcoming period, mentioning the labour market tightness and its structural determinants, as well as companies’ stronger hiring intentions for the near future, as pointed out by the surveys, alongside the new hikes in 2020 in the economy-wide gross minimum wage and public sector wages, carrying the potential to pass through into the private sector.
Other signs of inflationary pressures were also considered to be the relative pick-up in the annual growth rate of industrial producer prices on the domestic market for consumer goods in October-November 2019 and the slight increase in GDP deflator, according to the new statistical data for Q3, alongside high or even rising short-term inflation expectations over the last months, reported by some categories of economic agents.
As for the cyclical position of the economy, Board members noted that the new statistical data had reconfirmed the more pronounced deceleration in the economic expansion in Q3, concurrently with a modest, below-expectations slowdown in its quarterly pace, attributable inter alia to the drop in agricultural production, implying an additional, unexpected rise in excess aggregate demand in that period and its following a mildly higher trajectory than in the previous forecast. Moreover, some Board members underlined that the faster increase in purchases of goods and services had been reconfirmed, although the contribution made by private consumption to the economic advance had declined somewhat more visibly than in the previous assessment – on account of other sub-components –, being more significantly outpaced by that of gross fixed capital formation, whose annual growth rate had been revised upwards. However, the new data had also shown a stronger increase in the contractionary impact of net exports amid a more pronounced reacceleration in the growth of imports relative to that of exports of goods and services, also reflected in the renewed step-up in the annual dynamics of the negative balance on trade. In turn, the current account deficit had continued to widen in Q3 at an annual pace only slightly slower and its coverage by foreign direct investment and capital transfers had deteriorated further. Those trends were once again viewed as particularly worrisome by some Board members, inter alia in the context in which the weakening of exports had coupled with a faster decline in industrial production, mainly on the back of the automotive segment.
Board members shared the view that over the very short time horizon the positive output gap would probably remain close to the 2019 Q3 level, thus exceeding the November 2019 forecast, given the anticipation of a relatively faster economic growth in 2019 Q4 and 2020 Q1 overall, including as compared to the previous projection. Some Board members remarked that the latest high-frequency indicators also suggested a narrowing in 2019 Q4 of the negative differential between the contribution of private consumption to the economic advance and that of investment, whereas the negative contribution of net exports could decline slightly, given the slower annual dynamics of the trade deficit in October-November, amid a more pronounced loss of momentum of imports compared to that of exports of goods and services. However, the current account deficit had recorded a faster widening in the two months overall, following the deterioration of the primary and secondary income balances, while its coverage by autonomous capital flows had continued to decrease.
Looking at monetary conditions, Board members showed that the main ROBOR rates had preserved in January the previous month’s upward adjustment, while the average of interest rates on interbank transactions had fallen only marginally below the policy rate after the rise seen in December 2019. Some members underlined that the evolutions had reflected the stronger impact of Treasury operations on money market liquidity, alongside the effects of the NBR consistently carrying out deposit-taking operations. The IRCC level had, however, decreased at the onset of 2020 Q1 to 2.36 percent, from 2.66 percent in 2019 Q4, while the average interest rate on new loans had witnessed a steeper decline in December 2019 and hence its quarterly average had gone down further, those developments being likely to heighten the uncertainties about monetary policy transmission and conduct.
At the same time, it was observed that the leu exchange rate had remained virtually stable in January 2020, amid the relative alleviation of investors’ concerns about the deterioration of the fiscal position, coupled with the considerable interest rate differential, but also as a result of the persistence of a favourable global financial market sentiment, inter alia against the background of the decisions/expectations on the protracted accommodative monetary policy stance of the ECB and the Fed, as well as of the conduct of some central banks in the region. Some Board members drew, however, attention to the fact that, in the context of the twin deficits, a renewed increase in pressures on the exchange rate was highly possible, especially assuming adverse developments in the international environment that would overlap a potential repricing of risk associated by investors with the local financial market, which called on the central bank to remain alert.
Board members also remarked that the somewhat more visible slowdown in the growth rate of credit to the private sector in December 2019 – implying a decline in its quarterly average to 7.1 percent versus 7.9 percent in Q3 – had mainly been attributable to the annual contraction in the foreign currency component, a context in which the share of domestic currency loans in total private sector credit had widened to 67.6 percent at end-2019.
As for future developments, Board members showed that inflationary pressures were anticipated to weaken visibly in the first part of this year, before gradually regaining slight momentum, albeit somewhat more moderate than in previous assessments. Thus, the annual inflation rate was expected to decline significantly in the early months of 2020, but to re-embark on a slightly upward path in H2, staying in the upper half of the variation band of the target until the end of the projection horizon (i.e. December 2021), to reach 3.0 percent at end-2020 and 3.2 percent at end-2021 – marginally below the forecast published in the November 2019 Inflation Report.
It was noted that the sizeable downward correction expected for the first months of this year would be entirely attributable to the action of supply-side factors. The correction would be mainly driven by disinflationary base effects associated with previous developments in exogenous CPI components, as well as with the tax introduced in the telecom sector. The magnitude of the correction was presumed to be higher than previously foreseen, some Board members pointed out, given the removal of the special excise duty on motor fuels in January 2020, as well as the relatively more moderate developments anticipated for volatile food prices, whose impact would be only partly offset by the probably slower deceleration in the dynamics of tobacco product prices, amid the one-quarter frontloading of the increase in the specific excise duty. Mention was also made of the significant unexpected decline seen recently in oil prices, and to a smaller extent in other commodity prices, given the coronavirus outbreak, likely to induce downside risks to the current inflation outlook. At the same time, larger-than-expected increases could occur in some processed food prices, some members warned, but also in the case of administered prices, in the event of the liberalisation of natural gas and electricity markets in the not too distant future, implying costlier utilities for household consumers.
Furthermore, it was shown that fundamentals were expected to exert somewhat stronger-than-previously-anticipated inflationary pressures, and relatively steady over the projection horizon, given the forecasts on the cyclical position of the economy, wage costs, as well as import price dynamics, reflecting inter alia the expected developments in the leu exchange rate. Additionally, more pronounced inflationary effects would probably also be temporarily manifest at the level of core inflation on account of supply-side shocks, stemming from the agri-food sector, likely to partly offset the disinflationary base effect associated with the introduction of the telecom sector tax, which would become more visible in 2020 Q2. It was remarked that, against that background, the annual adjusted CORE2 inflation rate was expected to stick to higher levels than previously envisaged, especially in the first part of the projection horizon. Thus, it would probably fall only slightly below the upper bound of the variation band of the target in 2020 H1, before resuming growth and climbing in December 2020 above the previous forecasts, i.e. to 3.4 percent, and afterwards remaining virtually stable at that level, similar to the previously projected value for the end of the forecast horizon.
As regards the prospects for the cyclical position of the economy, according to Board members’ assessments, economic growth would probably witness a deceleration during 2020-2021 compared with 2019, but would remain solid, at a pace expected to fall only in 2021 visibly below the potential rate. That outlook would imply an initial levelling-off of excess aggregate demand at higher values than previously foreseen, followed by its embarking on a slowly downward trajectory.
Moreover, it was observed that, similarly to the previous assessment, household consumption would probably regain in 2020 and thereafter consolidate its position as the main driver of economic growth, amid swift dynamics of real disposable income – underpinned also by a lower inflation rate and larger social transfers –, as well as in the context of real bank rates assumed to rise very slowly across the forecast horizon. In turn, investment dynamics were anticipated to remain relatively robust – although moderating versus 2019 –, given inter alia the forecasted rise in public investment spending, associated with an improvement in EU funds absorption.
The uncertainties stemming from the fiscal and income policy stance, as well as the risks thus induced to the economic growth prospects and hence to the inflation outlook, continued however to be particularly high, Board members repeatedly underlined. Reference was made to the increase in the 2019 budget deficit significantly above 3 percent of GDP, worrisome inter alia in terms of financing costs, but also with possible implications for the current budget execution, especially in the context of the election calendar and the provisions of the new pension law. At the same time, however, mention was made of the EU fiscal governance framework, implying a possible start of fiscal consolidation during the current year, conducive to additional corrective measures on top of those already incorporated in the budget programme. It was shown again that resorting to a gradual fiscal correction and refraining from tax hikes during 2020 would prevent a sudden economic slowdown and all the more so a recession, implicitly a potential worsening of domestic and external imbalances against that background.
Board members were of the opinion that heightened uncertainties stemmed from the external environment as well, given the weakness of the euro area and global economies and the risks to their outlook induced by the coronavirus outbreak, as well as the potential reescalation of the global trade row and of uncertainties about Brexit. Also against that backdrop, the prospective further deterioration of the current account and of the economy’s overall external position was again considered a matter of particular concern, via the risks to macro-stability, but also to the sustainability of economic growth. In their assessments, Board members made new reference to the discrepancy between the robustness of domestic absorption and the softening of external demand, as well as to non-price competitiveness issues in some sectors, but also to price competitiveness losses recorded by some companies, amid the sustained increase in wage costs and the quasi-stability of the leu exchange rate. Furthermore, Board members reiterated the need for an orderly correction of the external imbalance, primarily through a fiscal adjustment, complemented by significant structural reforms, which however required time, underlining again the need for a balanced macroeconomic policy mix to avoid the overburdening of monetary policy, with undesired effects in the economy.
In that context, the importance of an adequate dosage and pace of adjustment of the monetary policy stance was reiterated, with a view to anchoring medium-term inflation expectations and bringing back and keeping the annual inflation rate in line with the inflation target, while safeguarding financial stability. At the same time, it was deemed that, given the macroeconomic conditions and the domestic and external risks, maintaining strict control over money market liquidity was of the essence.
Under the circumstances, the NBR Board unanimously decided to keep the monetary policy rate at 2.50 percent, while maintaining strict control over money market liquidity; it also decided to leave unchanged the deposit facility rate at 1.50 percent and the lending (Lombard) facility rate at 3.50 percent, as well as to keep in place the current level of the minimum reserve requirement ratio on leu-denominated liabilities of credit institutions. At the same time, given the developments in foreign currency lending and the adequate level of forex reserves, the NBR Board unanimously decided to cut the minimum reserve requirement ratio on foreign currency-denominated liabilities of credit institutions to 6 percent from 8 percent starting with the 24 February – 23 March 2020 maintenance period. The measure also aims 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.