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 declined in the first two months of 2023 overall, relatively in line with forecasts, going down to 15.52 percent in February from 16.37 percent in December 2022. It was noted that the decrease had been driven by the exogenous CPI components, whose disinflationary impact had stepped up during that period, as a result of the sizeable drop in the dynamics of fuel and electricity prices, under the impact of significant base effects and the change made to the energy price capping and compensation scheme starting 1 January 2023.
In its turn, the annual adjusted CORE2 inflation rate had slowed its rise even more visibly than anticipated, to reach 15.0 percent in February from 14.6 percent in December 2022, amid the mild deceleration in the annual growth rate of processed food prices, for the first time in 20 months. At the same time, the annual dynamics of the non-food sub-component had recorded a significantly slower increase, yet amid hefty or steeper price increases in the non-food and services segments, several Board members pointed out.
Following the analysis, it was agreed that the slower rise in inflation had been mainly attributed to disinflationary base effects and falling prices of some commodities, especially agri-food items, as well as to the downward adjustment of short-term inflation expectations, reflected inter alia by surveys, particularly among economic agents in industry, services and trade. However, their impact had been more than offset by the opposite influences that had continued to come in the first months of the year from the gradual pass-through into consumer prices of increased costs of materials and wages, as well as from the restoration or pick-up in profit margins, in the context of the resilience of consumer demand, but also from the rise in the prices of some imported consumer goods.
Board members observed, however, that after a quasi-steady upward path over the past two years, the annual dynamics of industrial producer prices for consumer goods on the domestic market had decreased in January and February, following the deceleration in the non-durables price dynamics too. Nevertheless, longer-term inflation expectations of financial analysts had come to near stagnation in the course of Q1, thus remaining above the variation band of the target, while the erosion in the consumer purchasing power had seen a halt in early 2023, as the annual growth rate of the average net nominal wage had caught up with the annual inflation, inter alia in the context of the hike in the economy-wide minimum wage, some Board members underlined.
As for the cyclical position of the economy, Board members showed that economic growth had slowed down only mildly in 2022 Q4, to 1.0 percent from 1.2 percent in the previous three months, thus exceeding expectations yet again, which made it likely for excess aggregate demand to pick up again over that period, contrary to expectations.
In annual terms, economic growth had, however, stepped up to 4.6 percent in 2022 Q4, from 3.8 percent in the prior quarter. The main contribution to economic growth had come, for the second quarter in a row, from gross fixed capital formation, followed at a short distance by the contribution from household consumption, which had seen a visible advance versus Q3. At the same time, the contractionary impact of net exports had decreased significantly, as the particularly large deceleration in the annual dynamics of the import volume had exceeded that in the annual dynamics of the export volume of goods and services. Against that background, the annual increase in the trade deficit had slowed down markedly in 2022 Q4, while that in the current account deficit had decelerated by two thirds to a two-year low, inter alia following the improvement in the evolution of the secondary income balance, on account of inflows of EU funds to the current account.
In 2022 as a whole, the current account deficit had widened, however, to 9.3 percent of GDP – the highest post-2008 level –, from 7.2 percent of GDP in 2021, Board members remarked, voicing again concerns over the magnitude and pace of its widening. At the same time, they also mentioned the major influences exerted in 2022 by the worsening of the terms of trade, as well as by the particularly strong pick-up in the flows of reinvested earnings and distributed dividends. In that context, it was noted that in 2022 economic growth had slowed down only mildly, to 4.8 percent from 5.8 percent in the prior year, given that the drop in the main contribution of private consumption to GDP increase had been offset by the rise in the contribution of gross fixed capital formation, as well as by the near halving of the negative contribution of net exports, which had thus reached the lowest level since 2016.
Looking at labour market developments, Board members showed that the growth in the number of employees in the economy had lost even more pace in December 2022-January 2023, while the ILO unemployment rate had posted only a very slight decline in January-February 2023, after its advance to 5.7 percent in 2022 Q4 from 5.5 percent in Q3, and the job vacancy rate had seen a sharper decline.
The annual growth rate of average gross nominal wage earnings had recorded however increasingly higher double-digit levels in 2022 Q4, especially in the private sector, although its advance had continued to be relatively slow. In January 2023, it had witnessed a slightly faster increase, largely on account of the hike in the gross minimum wage economy-wide and that in the construction sector. Against that background, the annual change in the nominal unit labour costs economy-wide had remained on an upward trend in 2022 Q4, while the particularly fast rise in unit wage costs in industry had stepped up in September 2022-January 2023, also owing to increased productivity losses in that sector.
In that context, Board members reiterated the need to closely monitor labour market developments, given, inter alia, the entrenched structural problems of the market that could trigger large wage hikes in certain sectors, especially amid the still high inflation. However, in certain areas, increases were expected to be moderated by firms’ constraints from elevated energy and commodity costs, by the weaker demand, but also by the outlook for a relatively fast disinflation in the current year, according to some Board members.
At the same time, it was noted that, in the first three months of 2023, the labour shortage reported by companies had seen a re-intensification of the downward trend visible since 2022 Q3. Employment intentions for the near-term horizon had remained on a downward trend overall, although in the context of significant fluctuations, suggesting a somewhat less tight labour market in the near future too.
Moreover, it was observed once again that, over the longer time horizon, the ability of some businesses to remain viable/profitable in the context of high costs would be probably 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. Reference was also made to the structural trends, such as the expansion of automation and digitalisation, alongside the higher resort by employers to workers from outside the EU, which would probably have an increasing impact on labour market conditions.
Turning to financial conditions, Board members showed that the main interbank money market rates had remained on a downward path in February-March. However, the downward adjustment had slowed and come to a halt towards the end of the period. At the same time, yields on government securities had posted increases in February, which had been fully corrected in March – in line with developments in advanced economies and in the region –, against the backdrop of successive revisions in investor expectations on the Fed’s and the ECB’s prospective monetary policy stance, as well as of the turmoil created by the collapse of Silicon Valley Bank and Signature Bank in the US and by the situation of Credit Suisse.
The leu had further exhibited a strengthening trend versus the euro during that period, reflecting the high relative attractiveness of investments in domestic currency and the broadly favourable risk perception towards financial markets in the region. The EUR/RON had returned only for a short while, in the closing days of March, to the vicinity of the values prevailing in 2022 H1. The USD/RON exchange rate had, nevertheless, halted its downward path seen since mid-2022 H2, posting a small increase in February, followed by a decline of a similar magnitude in March, as the US dollar had stopped its depreciation versus the euro.
Risks to the behaviour of the leu’s exchange rate continued, however, to come from the size of the external imbalance and from the uncertainties surrounding budget consolidation amid the war in Ukraine, as well as from the turmoil in the banking systems in the US and Switzerland, some Board members cautioned. Nevertheless, it was agreed that, over the near term, the opposite influences from the differential between domestic and international interest rates would probably continue to prevail, also amid revised investor expectations on the future paths of the Fed’s and the ECB’s key rates, with implications for capital flows.
At the same time, it was observed that the annual growth rate of credit to the private sector had decelerated more moderately in the first two months of 2023, reaching 10.6 percent in February from 12.1 percent in December 2022. That had owed to the slower decline in the dynamics of the leu-denominated component, under the influence of the marked increase in January in the volume of new loans to non-financial corporations under government programmes. Conversely, after the relatively abrupt step-up in the previous two quarters, the annual rate of change of foreign currency loans had remained relatively steady, although at a particularly high level. As a result, the share of the leu-denominated component in credit to the private sector had continued to fall, standing at 68.3 percent in February 2023 from 68.8 percent in December 2022.
As for future developments, Board members pointed out that, according to new data and assessments, the annual inflation rate would fall at a faster pace over the following months, in line with the latest medium-term forecast published in the February 2023 Inflation Report. Specifically, the annual inflation rate was envisaged to decline to one-digit levels in 2023 Q3 and then to 7.0 percent in December 2023 and to 4.2 percent in December 2024, implying that it would remain slightly above the variation band of the target at the end of the projection horizon.
It was observed that the decrease in the annual inflation rate would further be driven by supply-side factors, especially by disinflationary base effects and downward corrections of some commodity prices – inter alia of crude oil and agri-food commodities, amid the easing of wholesale markets –, as well as by the changes to energy price capping and compensation schemes as of 1 January 2023. The influences thus exerted would impact particularly electricity and fuel prices, as well as processed food prices to a certain extent, thereby affecting the future dynamics of core inflation as well, several Board members pointed out.
The presumed impact of the new setup of energy price capping and compensation schemes was, however, difficult to foresee, while the balance of supply-side risks to the inflation outlook was slightly tilted to the upside at the current juncture, Board members agreed. They referred to the crude oil output cuts recently announced by OPEC countries and to the vegetable shortage in Europe.
At the same time, it was remarked that the cyclical position of the economy was envisaged to exert stronger inflationary pressures over the near-term horizon and more gradually abating than in the prior forecast, as the new assessments indicated a much more subdued slowdown in quarterly economic growth in 2023 H1 than previously anticipated, after a GDP advance above expectations during 2022 Q4 as well. The developments rendered it likely for excess aggregate demand to see a more moderate contraction in the first part of 2023 than previously anticipated and stay on a higher path. They also implied still robust annual GDP increases in 2023 Q1 and Q2, albeit gradually decelerating, Board members showed.
It was noted that high-frequency indicators pointed to private consumption as the main driver of annual GDP advance in 2023 Q1, but also to a positive contribution from gross fixed capital formation, primarily on account of construction. An expansionary impact was possible during that period from net exports as well, given that the annual change in exports of goods and services had outpaced in January 2023 that of imports, which had posted a much steeper decline, probably owing, inter alia, to the improved terms of trade, some Board members noted. Consequently, trade deficit and current account deficit had contracted significantly versus the same year-earlier period.
However, the war in Ukraine and the related sanctions continued to generate significant uncertainties and risks to the outlook for economic activity, hence to medium-term inflation developments, to which added those stemming from the turmoil in the banking systems in the US and Switzerland. That could have adverse effects by affecting the economies of developed countries and the risk perception towards Central and Eastern Europe, with an impact on financing costs, Board members repeatedly underlined.
In that context, Board members stressed again the importance of attracting EU funds, especially those under the Next Generation EU programme. That 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, nevertheless, 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 significant increase in financing costs and, on the other hand, to the characteristics of the budget execution in the first two months of the year and to the packages of support measures to be implemented or extended during 2023, in a challenging economic and social environment domestically and globally, with potential adverse implications for final budget parameters. It was reiterated that, under the current circumstances, a balanced macroeconomic policy mix and the implementation of structural reforms, also by using EU funds 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 keeping the monetary policy rate unchanged, 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, inter alia by anchoring medium-term inflation expectations, in a manner conducive to achieving sustainable economic growth. Moreover, Board members 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 keep the monetary policy rate at 7.00 percent. Furthermore, it decided to leave unchanged the lending (Lombard) facility rate at 8.00 percent and the deposit facility rate at 6.00 percent. In addition, 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.