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; 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 referred to recent inflation developments. It was noted that the annual inflation rate had returned to positive territory in January 2017 and advanced to 0.2 percent in February, exceeding marginally the projected level. Apart from the base effect associated with the standard VAT rate cut to 20 percent, this had reflected the impact of an early return of annual price dynamics for vegetables, fruit and eggs to positive readings, amid bad weather across Europe at the beginning of this year. Opposite, albeit weaker, effects had had the lowering of the standard VAT rate to 19 percent and the removal of the special excise duty on fuels as of 1 January 2017, as well as the scrapping of non-tax fees and charges one month later, which had affected administered price dynamics in particular.
As for core inflation, Board members pointed out that, while the annual adjusted CORE2 inflation rate had risen, in line with expectations, to 0.91 percent in February, the same measure of core inflation, calculated by excluding the impact of the standard VAT rate cut, had stayed on the downtrend seen since November 2016, reaching 1.09 percent in February, from 1.21 percent in December 2016. It was observed that the drops in prices of compulsory motor third-party liability insurance policies from November 2016 to January 2017 had only partially been accountable for this deceleration, especially amid the presumed build-up of inflationary pressures from fundamentals, in particular of those stemming from the cyclical position of the economy. It was considered that, given the circumstances, an additional cause could have been the lagged indirect effects of past low prices of oil and other commodities, translating also into higher imports of consumer goods. A potential decline in core inflation sensitivity to the output gap was brought up and discussed as well.
Against this backdrop, Board members referred to the faster-than-expected pick-up in economic growth in 2016 Q4, to 4.7 percent year on year, against 4.3 percent in the previous quarter, implying a likely wider-than-anticipated reopening of the positive output gap. It was shown that, unlike the previous quarters, net exports had had the larger contribution to the acceleration of growth, while domestic demand had played a secondary part. At the same time, Board members remarked the much larger contribution from the change in inventories to annual GDP dynamics, which had offset the drop in the contribution of private consumption and general government consumption, and the fall into negative territory of the contribution from gross fixed capital formation, owing primarily to the contraction in civil engineering works. Moreover, as regards GDP formation, it was noted that services and net taxes on product had been the determinants of the pick-up in economic growth, with the services sector thus strengthening its dominant contribution to annual GDP dynamics.
Board members remarked that full-year GDP growth had hit a post-crisis high of 4.8 percent in 2016. This development had however been accompanied by an increase in the fiscal deficit to 2.4 percent of GDP, against 1.4 percent a year earlier, and a widening of the current account deficit to 2.3 percent of GDP, from 1.2 percent in 2015. Against this background, members noted the widening of twin deficits, as well as the fact that the current account deficit financing had entirely been covered from foreign direct investment and EU funds.
Discussions on labour market developments referred to the slightly faster rise in the number of employees economy-wide in 2016 Q4, together with the further fall in unemployment rate, which had touched a new record low in January 2017. Board members remarked the increasingly conspicuous labour shortfall facing employers in certain sectors, citing also the firm hiring intentions revealed by some specialised surveys for the period ahead. At the same time, they observed that the annual rate of increase of the average net wage earnings economy-wide had visibly regained momentum in January 2017, after having relatively slowed in the final quarter of last year, also on the back of a base effect associated with developments in public sector wages. Unit wage costs industry-wide had also risen at a swifter annual pace in the first month of this year – as the growth rate of labour costs had accelerated considerably faster than that of productivity –, so a protraction of this trend should be examined also in terms of price competitiveness of Romania’s exports. Nevertheless, some Board members pointed out that the uptrend in wages could help dampen emigration among both low and highly skilled workforce. Furthermore, some Board members mentioned that the period from 2012 to 2017 had seen the creation of around 700,000 new jobs, mostly in the private sector, also via potential changes in output composition implying workforce reallocations among sectors.
Turning to real monetary conditions, Board members took the view that they had remained accommodative in 2017 Q1, amid the rise in the leu exchange rate and annual inflation rate, concomitantly with the average remuneration of new time deposits remaining quasi-constant and the average lending rate on new business increasing somewhat January through February.
Mention was also made of the pick-up in the dynamics of credit to the private sector in February, largely on account of the advance in new loans to non-financial corporations. However, new consumer credit had witnessed a slower rise, possibly also due to the tightening of applicable credit standards. It was pointed out that, given the continued swift increase in the leu-denominated component and the marginally slower decline in the foreign currency component in annual terms, the share of domestic currency credit in total private sector loans had widened to 57.7 percent in February. This certified 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 remarked that overall credit developments were not a source of concern and, if imbalances were noticed on certain segments of lending, it would be analysed whether the implementation of macroprudential measures was warranted.
During the discussions on future developments, Board members noted that the current short-term forecast reconfirmed the outlook for the annual inflation rate to pick up slightly in the following months. The forecast also reconfirmed the annual inflation rate remaining significantly below the lower bound of the variation band of the target in June 2017, at a level only marginally above the previously-projected one, reflecting the upward revision of the expected price dynamics for vegetables, fruit and eggs and the downward revision of the anticipated pace of increase of fuel prices. It was remarked that the near-term outlook for inflation was compatible with the projected path of the annual inflation rate shown by the NBR’s latest medium-term forecast, published in the February 2017 Inflation Report. Specifically, the annual inflation rate was seen returning inside the variation band of the target in 2017 Q4, ending the year at 1.7 percent, before climbing into the upper half of the band and nearing its upper bound in 2018, prompted by the fading out of the one-off impact of the cuts/removal of indirect taxes, excise duties, non-tax fees and charges, as well as by the stronger inflationary pressures from aggregate demand and unit wage costs.
Board members then pointed out that the near-term outlook for adjusted CORE2 inflation was almost unchanged, even in the context of the reconfirmed prospects on quarterly GDP increases in the first part of 2017, implying – amid the faster-than-expected pick-up in economic growth in 2016 Q4 – a swifter widening of the positive output gap over the short time horizon. Moreover, it was noted that, in comparison to 2016 Q4, economic growth was expected to decelerate in annual terms in 2017 H1, yet to a markedly lower extent than in the latest medium-term forecast. In terms of the recent performance of high-frequency indicators, the main driver of economic growth in 2017 Q1 looked set to be consumer demand, along with a rebound in the contribution of net exports, whereas the contribution of gross fixed capital formation might stay negative, albeit shrinking versus the previous quarter.
In the Board members’ assessment, the current context added to uncertainties and two-way risks to the latest medium-term inflation forecast, given also the nature of revisions in the short-term prospects for inflation and economic growth, inter alia against the background of a decline in core inflation sensitivity to the output gap.
It was deemed that significant risks stemmed from the potential future stance of fiscal and income policies, as well as from the likely composition of public spending. Board members also pointed to same-way risks originating in the improving balance of risks to the growth outlook for the global and euro area/EU economies, prompted by the ongoing recovery of developed economies and the rebound in global trade, as well as by the brighter prospects for major emerging economies, inter alia amid the rise in demand for commodities and in their prices.
At the same time, relevance was also attached to the risks in the opposite direction stemming from the potential implementation of measures aimed at ensuring compliance of the fiscal deficit with the 3 percent-of-GDP reference value, as well as from the possibly further weak absorption of EU funds under the new Multiannual Financial Framework. Some members also noted downside risks to economic growth and inflation both in the euro area and globally, generated by the Eurozone election calendar, the Brexit talks, and by the uncertainty surrounding the prospects for the EU architecture over the long term. To these added similar risks arising from the nature of some economic policies potentially implemented by the new US Administration and from geopolitical tensions. Some members remarked that it was not clear which path crude oil prices would follow.
In the Board members’ opinion, significant two-way risks continued to be generated by the action of supply-side factors as well, although the potential slippage thereof from the anticipated coordinates was not seen as exerting a lasting impact on medium-term expectations. On the near-term horizon, risks originated primarily in the heightened uncertainties regarding the future adjustments in administered prices – especially those related to the energy market deregulation –, as well as the outlook for international oil prices and for prices of vegetables, fruit and eggs. Mention was also made of potential risks to the exchange rate induced, on one hand, by the current and future stance of fiscal and income policies and, on the other hand, by developments in international and regional markets, under the strong influence of monetary policy decisions taken by the relevant central banks. Against this background, several Board members underlined the need for a balanced macroeconomic policy mix with a view to safeguarding macroeconomic stability and consolidating the economy; the opinion was also voiced that monetary policy could not offset or counter weaknesses in other areas without such an approach leading to a suboptimal policy mix.
Some Board members considered that, in the short term, Romania would witness high economic growth, inflation under control, low unemployment, and financial stability. Over the long term, prospects for convergence with the euro area remained plausible, assuming larger capital stock and infrastructure development. Over the medium term though, there was uncertainty surrounding fiscal risks in particular amid the widening deficit during above-potential growth years.
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.