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 consumer prices, Board members showed that the annual inflation rate had risen to 3.24 percent in April 2021 from 3.05 percent in March and to 3.75 percent in May, thus exceeding the variation band of the target somewhat earlier than expected. It was observed that behind the upward path had stood almost entirely the exogenous CPI components, particularly the hike in fuel prices amid higher oil prices, and that modest additional influences had stemmed from higher tobacco prices and the relatively more pronounced increase in VFE prices.
At the same time, it was noted that the annual adjusted CORE2 inflation rate had risen to 2.9 percent in April 2021 from 2.8 percent in March, while remaining flat in May – contrary to the forecast indicating a further slow decline. That had occurred as the disinflationary base effects visible in the processed food sub-component had been more than offset by the opposite influences from the services segment and to a very low extent from the developments in the prices of some food and non-food items. Board members agreed that the latter influences could be overall attributable to a slight step-up in the annual depreciation of the leu against the euro, as well as to the temporary effects of the increase in consumer demand once with the easing of some mobility restrictions, overlapping those resulting from disruptions on the supply side and costs associated with more expensive raw materials and measures to prevent the spread of the coronavirus infection.
Against that backdrop, mention was made of the forced or precautionary household savings during the social distancing period, as well as of the robust increase in real disposable income over the last months, along with the upward trend in the dynamics of industrial producer prices on the domestic market for consumer goods. Short-term inflation expectations, which had increased significantly over the past months, were also pointed out, while longer-term inflation expectations had remained relatively stable. Turning to the cyclical position of the economy, Board members showed that economic activity had continued to recover in 2021 Q1 at a considerably faster pace than expected, albeit slower than in the previous quarter. Specifically, the economy had lowered its decline in annual terms to only -0.2 percent from -1.4 percent in 2020 Q4, given a 2.8 percent quarterly growth. Such an upturn had implied an almost full recovery in that period of the economic contraction in 2020 Q2, as well as the reopening of the positive output gap, two quarters ahead of the most recent medium-term forecast, Board members stressed.
At the same time, from the perspective of annual changes, the recovery had continued to be driven by domestic demand and household consumption had become again the major determinant, mainly due to the strong revival of purchases of goods, but especially of services, in the context of the easing of mobility restrictions. In turn, gross fixed capital formation had made a slightly higher positive contribution to annual GDP dynamics. The contribution had come therefore to prevail amid the leap taken by the change in net investment in equipment, whose impact had outweighed that of the significant loss of momentum seen by new construction works. Conversely, the negative contribution of net exports had recorded a significant pick-up, following a somewhat swifter growth rate of imports of goods and services than of exports thereof, entailing also a more pronounced widening of the trade deficit compared to the same period of the previous year. Both primary and secondary income balances had deteriorated markedly on the back of flows of reinvested earnings and, to a lower extent, of net inflows of EU funds. Under the circumstances, the current account deficit had recorded the largest annual increase in 14 quarters. The evolution was deemed to be a matter of particular concern by Board members, although it could be partly attributed to incidental factors – imports associated with the health crisis and exports of agricultural products affected by the drought of 2020 –, while the coverage of the current account deficit by autonomous capital flows had moved up, following the very strong advance in net FDI volume.
Looking at the labour market, Board members observed an improvement in its parameters starting with March 2021, including vis-à-vis expectations, amid the ongoing recovery in several economic sectors and the progress in vaccination, as well as due to government’s job retention scheme. Thus, the number of employees economy-wide had resumed the upward trend and its annual dynamics had returned to positive territory in April, also on account of a base effect, while the ILO unemployment rate had re-entered a downtrend, falling to 5.5 percent in May from 5.9 percent in January-February 2021. At the same time, the available data and information suggested an advance in the job vacancy rate in Q2 – given the phased lifting of several mobility restrictions –, and even difficulties in recruiting skilled labour in highly specialised industries, the total number of employees remaining however below the pre-pandemic level.
In the near future, the degree of labour market easing was expected to continue to decline, Board members agreed, given the firm hiring intentions for Q3 revealed by surveys, also likely to mitigate the risks arising from the termination at the end of June of government measures to retain the workforce. Over a somewhat longer horizon, however, uncertainties persisted about the epidemiological situation – given the spread in Europe of a more contagious Covid-19 variant and a slowing vaccination on the domestic front –, but also about the ability of some businesses to remain viable after the cessation of support programmes or in the context of a significant pick-up in some commodity prices. Also relevant were deemed to be the expansion of automation and digitalisation domestically, alongside employers’ growing trend to hire workers from abroad, as well as possible future actions aimed at enhancing the efficiency of public spending, carrying the potential to affect labour market evolution, apart from capping public sector wages.
Relative to financial market conditions, Board members showed that relevant interbank money market rates had continued to fall slightly May through June, thus fully reversing their increases recorded halfway through the previous quarter. Yields on government securities had also extended their slight downward course at the short end of the maturity spectrum, while, for longer maturities, they had seen moderate upward adjustments, partly correlated with the developments at EU level. Lending rates on the main types of new business to non-bank clients had extended or steepened their downtrend April through May 2021, also against the backdrop of a renewed decline in the IRCC. The downtrend of that index had considerably sharpened at the beginning of the current quarter, but would slow down markedly in the last three months of the year and subsequently would probably come to a halt, some Board members pointed out.
At the same time, after the mild increase in the first part of April, the EUR/RON exchange rate had tended to stabilise at the new readings, underpinned by the interest rate differential, which had narrowed, however, slightly versus some markets in the region, given the recent launch by two central banks of the policy rate hiking cycle. Nevertheless, some Board members drew attention to the risks surrounding the leu’s exchange rate developments posed by the external imbalance, as well as by other domestic economic fundamentals, especially assuming a sudden change in the global market sentiment.
It was remarked that the annual growth rate of credit to the private sector had stepped up considerably in the first two months of 2021 Q2, its average for the period overall advancing to 9.2 percent from 5.7 percent in Q1. The developments had reflected both a base effect and the intense lending activity across both major segments – non-financial corporations and households –, supported by government programmes only to a small extent, yet somewhat more firmly than in the previous two months. It was noted that, in the case of households, the flows of leu-denominated housing and consumer loans had stood in that period close to their historical peaks. Against that background, the share of the leu-denominated component in total private sector credit had widened to 70.6 percent in May, a record high for the post-January 1996 period.
Looking at future developments, Board members showed that, according to the latest information and analyses, the annual inflation rate would probably witness a steeper-than-anticipated rise over the short time horizon compared to the medium-term forecast published in the May 2021 Inflation Report, which had indicated a 4.1 percent peak in September-December 2021 and values of around 3 percent during 2022.
It was observed that the renewed sharper increase in the annual inflation rate was largely of a temporary nature too, the same as the pick-up seen in the first half of the year; it was attributable almost entirely to the action of supply-side factors, conducive to considerable disinflationary base effects in the following year. Determining factors were the larger hikes anticipated for natural gas and electricity prices in July 2021, to which added the markedly costlier fuels, in correlation with the rise in oil prices. Somewhat stronger-than-previously-envisaged inflationary effects were also likely in the case of VFE prices, inter alia in the context of demand from some sectors tending to recover amid the easing of restrictive measures.
The inflationary impact of supply-side factors could nevertheless be stronger and lengthier, and hence likely to affect medium-term inflation expectations, some Board members cautioned, referring to possibly larger hikes in energy prices, as well as to the synchronised increases in many commodity prices, alongside bottlenecks in production and supply chains, fuelling inflation worldwide. Mention was also made of the possibly higher pass-through of increased costs into prices, owing inter alia to losses incurred previously by firms in some sectors, as well as in the context of the pent-up demand surfacing amid the lifting of restrictions.
Several Board members underlined that a more sizeable pick-up in the inflation rate would, however, lead to a stronger erosion of households’ real disposable income and hence exert heftier adverse effects on consumer demand and aggregate demand over a considerable horizon. At the same time, it was shown that there were favourable signs of higher-than-expected agricultural output for certain crops in 2021, while some international agri-food commodity prices had recently seen downward corrections, at least in part, which would probably reflect in the CPI. It was concluded that risks to medium-term inflation expectations, although gaining relevance in that context, remained relatively subdued in the near run, but warranted the close monitoring of all developments.
Board members agreed that underlying inflationary pressures would, however, surface somewhat sooner than anticipated in the May forecast, given the likely renewed reversal – two quarters earlier – of the cyclical position of the economy. Moreover, economic activity was expected to increase further during Q2 and Q3, posting quarterly dynamics somewhat faster than anticipated in May, although decelerating gradually versus Q1. Those prospects rendered likely the widening of the positive output gap at mid-2021 H2 to a visibly higher value than that indicated by the May medium-term forecast.
Board members remarked that, in the context of the sizeable base effect associated with the economic contraction in the same year-earlier period, the quarterly dynamics implied a considerable increase, to a two-digit level, in the annual GDP growth rate in Q2, followed by its moderate decline during the following period. At the same time, it was observed that, according to recent developments in relevant indicators, both major components of domestic demand – private consumption and gross fixed capital formation – had contributed probably decisively to the abrupt pick-up in annual GDP dynamics in Q2; however, a modest contribution was also possible from net exports, as the hefty growth of exports in April had outpaced that of imports of goods and services. Under the circumstances, the year-on-year advance in trade deficit had posted a mild slowdown, while the annual growth rate of the current account deficit had contracted markedly, due inter alia to the primary and secondary income balances, remaining nevertheless above the average values seen in 2019 and 2020.
Board members shared the view that the evolution of the pandemic and of the associated restrictive measures continued, however, to generate – at least in the short run – high uncertainties and risks to the medium-term macroeconomic outlook, given the marked slowdown of the pace of vaccination on the domestic front and the uptrend in the infection rate in some European countries, amid the quick spread of the more contagious (Delta) coronavirus variant.
The fiscal policy stance also remained a source of uncertainties and risks, given the unknowns about the magnitude, pace and instruments of the budget consolidation presumed to be carried out gradually over the medium term – a key process for the necessary correction of the external imbalance and with favourable implications for the sovereign risk premium and financing costs, several Board members pointed out. It was shown that uncertainties were fuelled by constraints stemming from the large volume of permanent expenditures and from the recent hike in some commodity prices, as well as by the positive impact exerted on the dynamics of budget revenues by multiple factors, including nominal GDP growth well above the budget assumption; in fact, the latter largely explained the budget execution result for the first five months of the year. At the same time, however, some members noted that the European institutions’ recent recommendations in the context of the excessive deficit procedure set forth a certain adjustment path in the 2021-2024 period, as well as a particular treatment of unanticipated revenues, also calling for the enactment of additional corrective measures. Under the circumstances, Board members deemed that the coordinates of the upcoming budget revision and especially the budget consolidation strategy presumed to be prepared by autumn and submitted to the EC were particularly important in terms of the short- and medium-term characteristics of the fiscal policy.
Several members were of the opinion that high uncertainties were further associated with the absorption rate of EU funds allocated to Romania via the Recovery and Resilience Facility, as well as of those under the new Multiannual Financial Framework 2021-2027. They referred to the delay in completing – and hence in the EC approving – the National Recovery and Resilience Plan, as well as to Romania’s institutional capacity and track record in that respect.
In the Board members’ unanimous opinion, the analysed context warranted leaving unchanged the monetary policy rate and the interest rates on the NBR’s standing facilities. Such a calibration of the monetary policy conduct aimed to preserve price stability over the medium term in line with the 2.5 percent ±1 percentage point flat inflation target, in a manner conducive to achieving sustainable economic growth in the context of fiscal consolidation, while safeguarding financial stability. Moreover, it was deemed necessary to closely monitor 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 1.25 percent; moreover, it decided to leave unchanged the deposit facility rate at 0.75 percent and the lending (Lombard) facility rate at 1.75 percent. Furthermore, 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.