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; Dan-Radu Rușanu, Board member; 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 developments in inflation, Board members showed that the annual inflation rate had reached 16.76 percent in November, exceeding the forecasts, after its fall to 15.32 percent in October from 15.88 percent in September. It was noted that, alongside the pick-up in food prices, a major driver of the hike seen during that period had been the advance in the prices of non-food items and market services, whereas the fuel price dynamics had posted a steeper decline, amid the downward trend in crude oil prices and the firewood price cap, so that the overall contribution of exogenous CPI components had remained disinflationary.
By contrast, the annual adjusted CORE2 inflation rate had posted again a slightly faster upward movement, contrary to expectations, rising from 11.9 percent in September 2022 to 14.0 percent in November 2022. That time round, the advance had been mainly triggered by the non-food sub-component, given almost across-the-board and faster price increases in the non-food and services segments. The evolution could however be short-lived, probably reflecting late or additional cost increases, as well as adjustments in profit margins, in the context of still relatively robust consumer demand, though anticipated to weaken in the near future, several Board members deemed.
Following the analysis, it was agreed that the increase in annual adjusted CORE2 inflation rate had still been ascribable to global supply-side shocks – amplified and extended by the war in Ukraine and the associated sanctions –, but also to the widespread drought in 2022. Their direct and indirect inflationary effects had been compounded in the first months of 2022 Q4 too by the high short-term inflation expectations, the resilience of demand in certain segments, as well as by the significant share of food items and imported goods in the CPI basket.
At the same time, however, it was observed that the dynamics of industrial producer prices for consumer goods on the domestic market had continued to see a slower increase in the first two months of 2022 Q4, amid the steeper decline in the change in durables prices, while short-term inflation expectations of economic agents in industry, trade and construction had resumed their decrease towards the end of last year, after a short-lived stagnation. Moreover, longer-term inflation expectations of financial analysts had witnessed a new downward revision in November-December 2022 overall, remaining however above the variation band of the target, while the dynamics of the average net real wage had remained significantly negative in early 2022 Q4, reflecting the erosion of the consumer purchasing power, some Board members underlined.
As for the cyclical position of the economy, Board members noted that in 2022 Q3 economic activity had expanded at a pace similar to that in the previous three months, i.e. 1.3 percent, considerably exceeding expectations, but amid a notable downward revision of statistical data on GDP dynamics for 2020-2022. It was concluded that the developments made it likely for the excess aggregate demand to pick up again over that period, contrary to expectations.
By contrast, compared to the same year-earlier period, GDP growth had continued to decelerate in 2022 Q3 – to 4.0 percent from 5.1 percent in Q2 –, instead of re-accelerating as anticipated, remaining however significant from a historical perspective. The economic growth had been supported, that time round, mainly by gross fixed capital formation and only to a secondary extent by household consumption, while the contribution of net exports had strongly re-entered negative territory, given that the annual growth rate of imports of goods and services had notably exceeded that of exports thereof in terms of volume. Consequently, trade deficit and current account deficit had posted a considerably faster annual pace of increase in spite of the significant narrowing of the unfavourable differential between the lower annual change in import prices and that in export prices. The magnitude and pace of widening of the external deficit in 2022 were viewed as particularly worrisome by Board members, reflecting, alongside the major impact of the worsening terms of trade – significantly affecting other European economies too –, competitiveness issues across some sectors and companies.
Looking at labour market developments, Board members noted that the new monthly rises in the number of employees economy-wide in September-October 2022 had been visibly lower than those in H1, inter alia as a result of the decline in personnel in the private sector, and that the ILO unemployment rate had seen a marginal advance in October-November, after its almost uninterrupted decrease over the last two years to 5.4 percent 2022 Q3. Moreover, the annual growth rate of average gross nominal wage earnings had posted a slower upward trend in the first four months of 2022 H2. However, in 2022 Q3, the pace of increase of unit wage costs economy-wide had almost doubled, whereas the two-digit annual dynamics of unit labour costs in industry had continued to step up relatively fast, including in October, but amid larger adverse effects exerted by energy and commodity costs on labour productivity in that sector, according to several Board members.
At the same time, it was observed that, according to the latest surveys, labour shortage reported by companies had remained in 2022 Q4 at the lower level reached in Q3 and that, after a visible recovery October through November, the hiring intentions for the near-term horizon had seen a new decline in the last month of 2022, inter alia in the context of the uncertainties generated by the war in Ukraine and the tightening of financial conditions across Europe and worldwide, with an impact on demand too.
Moreover, it was reiterated that, beyond the near-term horizon, the ability of some businesses to remain viable/profitable in the context of high costs would be challenged also by the cessation of government support measures, as well as by the need for technology integration, possibly leading to new restructuring or bankruptcy of firms. In addition, labour market would probably be increasingly impacted by the influences of the expansion of automation and digitalisation domestically, as well as of the higher resort by employers to workers from outside the EU.
Board members deemed that the persistence in the near future of a relatively lower degree of labour market tightness, as suggested by the specific indicators, and the high energy and commodity costs were likely to put a break on wage increases in the first months of the current year, at least in certain segments. It was agreed, however, that the high inflation level called for the close monitoring of labour market developments, considering inter alia the entrenched structural problems of that market, as well as the hikes in public and private sector wages in early 2023, under the impact of the notable rise as of 1 January 2023 in the economy-wide gross minimum wage.
Turning to financial conditions, Board members referred to the gradual downward adjustment of the main interbank money market rates November through December 2022, amid the easing of liquidity conditions. Moreover, they remarked that yields on government securities had declined more steeply during that period, inter alia under the influence of the improvement in global financial market sentiment and in the risk perception towards financial markets in the region. The average lending rate on new business and the average remuneration of new time deposits in the case of households had continued, however, to climb in the first two months of 2022 Q4.
Against that background, reflecting also an increase in the relative attractiveness of investments in domestic currency, the leu had posted an appreciation trend versus the euro during the last two months of 2022 as well, Board members pointed out. Furthermore, the domestic currency had strengthened significantly in relation to the US dollar during that period – visibly reversing the depreciation seen in the first three quarters of the year –, as the latter had weakened more sharply against the euro, owing primarily to expectations on the relative slowdown in monetary policy tightening by the Fed, implicitly by comparison to the ECB.
Risks to the behaviour of the leu’s exchange rate – likely to also affect external vulnerability indicators – continued, however, to come from the widening external imbalance and the uncertainties surrounding budget consolidation, as well as from a possible renewed sudden worsening of the risk perception towards financial markets in the region, amid the war in Ukraine and the imposed sanctions, some Board members cautioned. Nevertheless, Board members were of the opinion that opposite influences were expected from the policy rate differential, given the halt in key rate hikes by central banks in the region.
At the same time, it was observed that the annual dynamics of credit to the private sector had seen a sharper decrease, reaching 13.2 percent in November from 16.0 percent in September, amid the further slower growth of the leu-denominated component. However, its impact had been somewhat counterbalanced by the continued uptrend in the high dynamics of foreign currency loans, under the influence of developments in credit to non-financial corporations. As a result, the share of leu-denominated loans in credit to the private sector had continued to fall slowly, to 69.4 percent in November from 70.6 percent in September.
As for future developments, Board members showed that, according to the new information and assessments, the annual inflation rate would probably decline in 2023 Q1 in line with the latest medium-term forecast, but would fall at a significantly faster pace afterwards, to reach one-digit levels in 2023 Q3 already, almost three quarters earlier than previously projected. That would be ascribable to the extension of energy price capping and compensation schemes until 31 March 2025, concurrently with the changes made to these schemes starting 1 January 2023. It was reminded that the forecast in the November 2022 Inflation Report, based on the presumed expiry of capping schemes in September 2023, had seen the annual inflation rate on a gradual downward path until 2024 H1, yet steeper thereafter, implying that it would reach 11.2 percent in December 2023, but 4.2 percent at the end of the projection horizon – standing, however, slightly above the variation band of the target.
Alongside the changes to the capping schemes, the major drivers behind the near-run decrease in annual inflation would be the disinflationary base effects associated with the sizeable hikes recorded previously by energy and fuel prices, as well as the relatively steeper downtrend of oil prices in recent months, Board members remarked. Starting 2023 Q1, small disinflationary base effects would probably be manifest in the processed food segment as well, impacting the future dynamics of core inflation, several members pointed out.
Moreover, it was agreed that the balance of supply-side risks to the new inflation outlook remained in relative equilibrium at the current juncture, given the recent developments in key energy and agri-food commodity prices, as well as those in their major determinants.
It was observed that the cyclical position of the economy was envisaged to exert, however, stronger-than-previously-anticipated inflationary pressures, albeit relatively modest and abating in the near run, as the latest assessments pointed to a gradual slowdown in economic growth in 2022 Q4 - 2023 Q1 – under the impact of the protracted war in Ukraine and the extension of associated sanctions –, yet after a new GDP advance significantly above expectations in 2022 Q3. The evolutions made it likely for excess aggregate demand to shrink during that period, but run higher than forecasted in November 2022. Developments also implied still robust annual GDP dynamics in 2022 Q4, amid a base effect, followed however by a visible reduction in 2023 Q1, Board members remarked.
According to high-frequency indicators, private consumption would probably become again the major driver of annual GDP growth in 2022 Q4, while a positive – albeit much more modest – impact was expected from gross fixed capital formation, mainly on account of construction works, Board members noted. Conversely, net exports could make a larger negative contribution to GDP dynamics, as the annual change in exports had declined considerably in October 2022 and much more steeply than that in imports, inter alia amid the unfavourable evolution of external prices, which had also led to an acceleration in the annual increase in trade and current account deficits.
The protraction of the war in Ukraine and the extension of the related sanctions generated, however, considerable uncertainties and risks to the outlook for economic activity, hence to medium-term inflation developments, Board members repeatedly showed. They referred to the possibly stronger effects thus exerted on consumer purchasing power and confidence, as well as on firms’ activity, profits and investment plans, but also to the more severe potential influences on the European/global economy and the risk perception towards economies in the region, with an unfavourable impact on financing costs.
Furthermore, Board members stressed the importance of absorbing EU funds, especially those under the Next Generation EU programme, which was conditional on fulfilling strict milestones and targets for implementing the projects, but was essential for carrying out the necessary structural reforms, energy transition included, as well as for counterbalancing, at least in part, the contractionary impact of supply-side shocks, compounded by the war in Ukraine and by the tightening of economic and financial conditions worldwide.
Major uncertainties and risks were, however, further associated with the fiscal policy stance as well, Board members agreed. They referred, on one hand, to the public deficit target set for 2023 in order to continue budget consolidation amid the excessive deficit procedure and the hefty increase in financing cost and, on the other hand, to the packages of support measures to be implemented or extended during 2023, in a still challenging economic and social environment domestically and globally, with potential adverse implications for budget parameters. It was shown again that, under the current circumstances, a balanced macroeconomic policy mix and the implementation of structural reforms to foster the growth potential over the long term were of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand adverse developments.
Board members were of the unanimous opinion that the reviewed context overall warranted a 0.25 percentage point increase in the monetary policy rate, so as to anchor inflation expectations over the medium term and to foster saving, with a view to bringing the annual inflation rate back in line with the 2.5 percent ±1 percentage point flat target on a lasting basis, in a manner conducive to achieving sustainable economic growth.
Moreover, they reiterated the importance of further closely monitoring domestic and global developments so as to enable the NBR to tailor its available instruments in order to achieve the overriding objective regarding medium-term price stability.
Under the circumstances, the NBR Board unanimously decided to increase the monetary policy rate to 7.00 percent from 6.75 percent. Moreover, it decided to raise the lending (Lombard) facility rate to 8.00 percent from 7.75 percent per annum and the deposit facility rate to 6.00 percent from 5.75 percent. Furthermore, the NBR Board unanimously decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.