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 the recent characteristics and the updated forecast of medium-term macroeconomic developments submitted by the specialised departments, as well as on other available domestic and external information.
While discussing the recent behaviour of inflation, Board members showed that the annual inflation rate had marginally fallen in September to 5.03 percent from 5.06 percent in August and that in Q3, as a whole, its decline had been slightly below expectations. Behind its decrease from 5.4 percent in June had mainly stood the base effects associated with developments in administered prices and fuel prices, only partly offset by the faster increase in annual terms in the vegetables prices.
Core inflation had continued to slightly contribute to the deceleration in inflation in Q3, as the annual adjusted CORE2 inflation rate had gone down from 2.9 percent in June to 2.7 percent in September. The movement had mainly been triggered by processed food items and, to a lower extent, by services – more strongly influenced by the base effects associated with developments in some international agri-food prices and by the relative strengthening of the leu against the euro. Board members noticed that, in September, the drop in the annual core inflation rate had been more modest than anticipated, the evolution suggesting a fading-out of the relatively calming stimuli that had probably stemmed from the sudden deceleration in consumer demand in the first quarter of the current year. At the same time, short-term inflation expectations had remained unchanged, while the new statistical data had reconfirmed the further rise in GDP deflator in Q2 and had also indicated slightly faster annual dynamics of industrial producer prices for consumer goods on the domestic market in the first two months of Q3. In turn, the annual growth rate of the unit wage cost in industry had sped up again in August after having slowed in the previous two months.
In that context, Board members emphasised the tightness of the labour market, also referring to the new historical low of 4.1 percent recorded by the ILO unemployment rate in September. Labour market tensions inherently inducing wage pressures were seen to remain high in the near run, given the firm hiring intentions revealed by some specialised surveys, the high employee turnover during the current year and the increased difficulties in recruiting skilled labour, inter alia amid the massive emigration of the working-age population. Reference was made to the double-digit level further posted by the annual dynamics of the average gross nominal wage earnings in July-August, the slight deceleration versus Q2 notwithstanding. The annual change in the average net real wage earnings had remained above the Q1 average.
As for the cyclical position of the economy, Board members showed that the second provisional version of statistical data also illustrated the slight acceleration in economic growth to 4.1 percent in Q2 from 4 percent in Q1, given the step-up in its quarterly dynamics, thus reconfirming a larger-than-anticipated re-widening of the positive output gap in that interval. It was remarked that the composition of economic growth drivers on the demand side had, however, undergone a significant change – probably relevant from the perspective of inflationary pressures. Specifically, the contribution from the change in inventories had been revised upwards, thus becoming prevalent for the first time in five years, to the detriment of the contribution from household consumption, which had been subject to a downward adjustment. Furthermore, the contribution of gross fixed capital formation had moved deeper into negative territory, whereas the negative contribution of net exports to the advance in GDP had diminished more visibly against the previous interval, in the context of a more pronounced deceleration in the growth rate of imports than in the dynamics of exports. The supply side had seen minor revisions, the services sector remaining the main engine of economic growth, ahead of industry, the contribution of which had risen slightly.
Board members then remarked that the latest assessments continued to indicate a significant deceleration in economic expansion, in annual terms, in Q3, mainly amid some base effects, followed by a relatively more modest re-acceleration in 2018 Q4, given obviously slower quarterly dynamics than in Q2, although marginally above the potential growth rate. Therefore, the evolution would probably determine a further rise in the positive output gap during H2 on a significantly higher trajectory than previously anticipated, amid its stronger-than-expected re-opening in Q2. In light of the latest relevant developments, private consumer demand was deemed to have become again the engine of economic growth in Q3, while also further contributing to its slowdown. By contrast, gross fixed capital formation may have increased its negative contribution to GDP growth, much the same as net exports, given the re-acceleration of the annual growth of imports of goods in July-August, concurrently with the drop in the dynamics of exports. Another matter of concern was considered to be the renewed step-up in the annual growth rate of the current account deficit – also on account of the relative worsening of the primary income balance, as well as of the secondary income balance –, in parallel with the decrease in its coverage by foreign direct investment and capital transfers.
Relative to monetary conditions, Board members underlined again the substantial spread between the key interbank money market rates and the monetary policy rate and remarked its slight widening in October. A particular reference was made to the relative stability further displayed by the leu exchange rate against the euro, even in the context of heightened volatility of the global risk appetite, with comments on the attractiveness of investment in domestic currency, also due to the considerable interest rate differential versus the prevailing levels in the EU and across the region.
It was noted that the annual advance in credit to the private sector had abated somewhat in September, down to 6.3 percent from 6.6 percent in August, with its quarterly average showing a similar decline versus the previous interval. In September, the slowdown owed to the domestic currency component, the annual dynamics of which had declined slightly faster, on the back of housing loans and loans to non-financial corporations; conversely, the annual rate of increase of leu-denominated credit for consumption, other purposes and business expansion had posted a renewed step-up. The share of leu-denominated credit in the private sector loans had further widened marginally to 65.4 percent.
During the discussions regarding future developments, Board members highlighted the outlook for the annual CPI inflation rate to decline markedly during Q4 to 3.5 percent in December 2018 – as reconfirmed by the new medium-term forecast –, before probably declining and thereafter remaining in the upper half of the band, on a downward path until 2019 Q3. However, it was noted to be slightly higher than previously projected, to reach 2.9 percent in December 2019 and 3.1 percent at the end of the projection horizon, compared to 2.7 percent and 2.8 percent respectively in the prior forecast.
Given that the major contribution to the sharper downtrend of the annual inflation rate in the short term was anticipated from the action of supply-side factors – inter alia, the base effects associated with increases seen in all exogenous CPI components starting 2017 H2 –, Board members remarked the heightened uncertainties surrounding the outlook for these categories of prices. Notable uncertainties were attached to the movements in oil prices and adjustments in administered prices, particularly electricity and natural gas prices, posing upside risks to short-term inflation. Mention was also made of a possibly higher-than-previously-anticipated rise in tobacco product prices, as well as in some food prices amid the developments in prices of some agri-food commodities and the African swine fever outbreak, considering that such a context remained relevant in terms of the implications for medium-term inflation expectations.
Board members noted that the annual adjusted CORE2 inflation rate would likely be stuck to a downtrend over the months ahead and would fall to 2.5 percent in December 2018, slightly below the previously-projected level, amid relatively heftier disinflationary influences from prices of some agri-food commodities. Core inflation was, however, anticipated to gather momentum again starting 2019 Q1 and its annual dynamics to climb to 3.3 percent at the end of the projection horizon – marginally above the previously-anticipated level – amid a build-up of gradually rising inflationary pressures projected to stem from the cyclical position of the economy, short-term inflation expectations and import prices. It was pointed out that the positive output gap would likely widen until 2019 Q1 and then remain above the previously-projected values, while the dynamics of import prices were expected to be slightly slower than previously anticipated in the latter half of the forecast interval.
As regards the prospects for the cyclical position of the economy, Board members noted that the current forecast indicated a slightly more modest slowdown in economic growth in 2018 than the prior forecast. Moreover, economic expansion was anticipated to gather momentum again next year, exceeding its potential rate, before returning to a pace in line with the potential one in 2020. It was shown that the projections implied an abatement of the expansionary nature of fiscal policy in 2018, which was seen remaining unchanged in 2019 and becoming quasi-neutral in 2020, as well as a deceleration – albeit more modest than previously envisaged – in the dynamics of households’ real disposable income. In Board members’ opinion, labour market tightness and the fiscal and income policy stance continued to pose risks, in the near future at least. Those were seen stemming especially from the budget execution features in the first three quarters of 2018 and from the uncertainties over the planned budget revision and the 2019 budget programme, as well as over potential future hikes in public sector wages and other types of income.
It was shown that the outlook for economic growth also assumed less accommodative monetary conditions over the projection horizon and a probable improvement in EU funds absorption, together with still robust economic growth in the euro area/EU and globally, albeit slightly slower than in the previous forecast. At the same time though, some Board members pointed out the heightened uncertainty about the near-term outlook for Europe’s economy and the global economy, mentioning the protectionist trade policies, the UK’s exit from the EU, the political tensions in some European countries and the swings in international financial market volatility. Furthermore, Board members repeatedly touched upon the ECB’s monetary policy stance and its relevance to the decisions taken by central banks in the region, and upon the fact that the NBR’s decisions could not overlook that context.
Looking at the drivers of economic growth, Board members remarked that the contribution of household consumption to GDP growth could be exceeded this year by that of the change in inventories, but could prevail again in 2019. It was noted that consumer demand was expected to be supported over the short time horizon by household confidence and the dynamics of real disposable income – reflecting also the declining annual inflation rates –, whose future behaviour continued, however, to be uncertain.
A matter of concern was, in the opinion of Board members, the probably negative contribution of gross fixed capital formation to this year’s GDP growth, weighing on the economy’s domestic and external equilibria. Reference was made to the large contraction in the volume of construction works January through August 2018, the lower-than-planned EU funds absorption and the budget spending composition that had been increasingly unfavourable to public investment. The decline in the volume of foreign direct investment was also pointed out. At the same time, the prospects of a worsening contribution from net exports to this year’s economic growth were emphasised, alongside the likely rise in the current account deficit-to-GDP ratio. Against that background, Board members underlined again the need for a balanced macroeconomic policy mix, to avoid the overburdening of monetary policy, with undesired effects economy-wide. Moreover, most Board members reiterated the importance of the dosage and pace of adjustment of the monetary policy stance 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.
Under the circumstances, the NBR Board unanimously decided to keep unchanged the monetary policy rate at 2.50 percent, the deposit facility rate at 1.50 percent and the lending (Lombard) facility rate at 3.50 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.