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 15.32 percent in August, marginally above the forecasts, after its fall to 14.96 percent in July, from 15.05 percent in June. It was noted that the new increase had been almost entirely driven by the continued hike in food prices, including the VFE component, however largely counterbalanced by the decline in fuel prices – amid motor fuel price compensation and lower oil prices –, as well as by the base effects associated with developments in energy prices.
The annual adjusted CORE2 inflation rate had continued to climb at a sustained faster-than-expected pace in July-August, albeit slower than in the previous quarters, going up to 11.2 percent in August, from 9.8 percent in June. At the same time, the contribution from the processed food sub-component to the advance had touched a new high in recent quarters, mainly reflecting the hikes in commodity and energy prices, while the contribution from non-food items had remained modest and that from the services sub-component had become virtually zero, inter alia amid the evolution in annual terms of the EUR/RON exchange rate, Board members noted.
Following the analysis, it was agreed that the upward movement in the annual adjusted CORE2 inflation rate in July-August had still been ascribable to global supply-side shocks – amplified and extended by the war in Ukraine and the associated sanctions –, but also to widespread drought in Europe in the current year. Their direct and indirect inflationary effects had continued to be compounded during summer by the high short-term inflation expectations, the further release of pent-up demand in certain segments, as well as by the significant share of food items and imported goods in the CPI basket. The inflationary impact of supply-side shocks had continued to pick up recently in Europe, as well as in other advanced countries, including on core inflation, several Board members pointed out, citing the rise in the annual inflation rate in September to 10 percent in the euro area and values ranging between 15 percent and 19 percent in Romania’s neighbouring countries.
Nevertheless, Board members also underlined the more subdued advances seen in July-August by the growth rate of industrial producer prices on the domestic market for the consumer goods segment, on the back of the deceleration in durables price dynamics, as well as the downward adjustments over the last months in short-term inflation expectations of economic agents in industry, trade and construction, from the very high levels seen previously. Reference was also made to longer-term inflation expectations of financial analysts, which had posted only a very slight advance over that period, yet running above the variation band of the target, as well as to the increasingly obvious erosion trend of the consumer purchasing power, reflected in the faster negative dynamics of the average real net wage in early Q3.
As for the cyclical position of the economy, Board members noted that economic growth had slowed down considerably in 2022 Q2 versus the previous quarter – to 2.1 percent from 5.1 percent –, yet way less than anticipated. It was concluded that the developments made it likely for the excess aggregate demand to see a new moderate rise during that period, contrary to expectations.
Moreover, annual GDP growth had continued to exceed significantly the forecasts, posting only a slight deceleration in 2022 Q2, to 5.3 percent, from 6.4 percent in Q1. However, the largest contribution to economic growth had come from the change in inventories, while the contribution from household consumption, ranking second in terms of size, had diminished visibly versus the previous quarter and that of gross fixed capital formation had remained very modest, although on a slight increase, Board members noted.
At the same time, the contribution of net exports had seen a renewed strong contraction, given the slowdown in the annual dynamics of exports, concurrently with the significant re-acceleration in the annual dynamics of the imports of goods and services. Trade deficit and current account deficit had however posted a slower annual pace of increase in Q2 – with the latter witnessing a more pronounced deceleration –, amid the marginal narrowing of the unfavourable differential between the dynamics of import prices and those of export prices, but also owing to the improvement in the evolution of the primary income balance. The size and pace of increase of the external deficit remained, nevertheless, particularly worrisome, although in recent months they had been largely attributable to the worsening of the terms of trade and the impact of incidental factors, seriously affecting other European economies too, Board members repeatedly underlined.
Looking at labour market developments, Board members showed that the number of employees economy-wide had visibly lost pace in June-July, on the back of private sector developments, while the further drop in the ILO unemployment rate to 5.1 percent in August had been accompanied during 2022 Q2 by a slight contraction in the job vacancy rate, for the first time in six quarters. At the same time, the double-digit annual dynamics of the average gross nominal wage earnings had come to an almost standstill over the last months, hence leading to a larger negative differential vis-à-vis the inflation dynamics. The evolution had been nonetheless accompanied by a new acceleration of the annual growth rate of unit labour cost in industry, as a result of considerably growing productivity losses amid the energy crisis affecting domestic industrial activity and that of trading partners.
Moreover, it was observed that the latest surveys indicated a slight decrease in the labour shortage reported by companies, after its continuous increase since end-2020, as well as a relative weakening of hiring intentions in the near run, in the context of the extremely high energy costs and the uncertainties generated by the war in Ukraine and the related increasingly strict sanctions, with an impact on demand too. That context – implying a probable reduction of labour market tightness in 2022 H2 – carried the potential to put a break on the pick-up in the wage growth rate in the coming future, even amid the more elevated inflation rates currently seen, according to several Board members.
At the same time, 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. Mention was also made of the notable uncertainties stemming from the expansion of automation and digitalisation domestically, alongside a higher resort to workers from outside the EU.
Turning to financial market conditions, Board members observed that the main interbank money market rates had recently stabilised marginally above the values reached towards end-July, after slight downward adjustments recorded in August, on the backdrop of the NBR’s monetary policy decision and its forward guidance in that context. Moreover, it was pointed out that yields on government securities had partly recovered in September the decreases seen in July-August and had followed a moderately upward path, in line with developments in advanced economies and in the region, amid the major central banks’ signals/decisions on the further strong monetary policy tightening, associated with an increase in global risk aversion. The average interest rate on new loans had posted, however, a markedly faster growth July through August, also as a result of the rise in the IRCC at the onset of Q3, while that on new time deposits had continued its swift advance, including in the household segment, although its real level had remained significantly negative, several members underlined.
Against that background, but also amid the fading of the seasonal influence exerted by some domestic factors in summer, the leu had fully corrected in September the significant appreciation versus the euro recorded July through August, while in relation to the US dollar the domestic currency had depreciated following the movements on international financial markets, Board members noted. At the same time, it was agreed that risks to the behaviour of the leu’s exchange rate – with potential consequences for inflation and external vulnerability indicators – continued to come from the level and trend of the external imbalance and from the uncertainties surrounding budget consolidation, as well as from a possible further worsening of the risk perception associated with financial markets in the region, amid the escalation of the war in Ukraine. Opposite influences were, nevertheless, expected to stem from the narrowing of the short-term interest rate differential, given the quasi-halt in key rate hikes by central banks in the region, according to some members.
Furthermore, the recent turning point in the double-digit annual growth rate of credit to the private sector was highlighted. Thus, after a quasi-steady upward path for almost two years, it had started to shrink gradually at the beginning of H2, falling to 15.9 percent in August from 17.5 percent in June, mainly following the steeper drop in the high dynamics of the domestic currency component. That had been ascribable to developments across both major segments – households and non-financial corporations –, even amid a slightly higher contribution from government programmes. As a result, the share of leu-denominated loans in credit to the private sector had declined slightly to 71.8 percent in August, against 72.0 percent in mid-year.
As for future developments, Board members showed that, according to the new assessments, the annual inflation rate would probably stick to an upward path until towards year-end, yet at a visibly slower pace, thus climbing above the slightly decreasing values envisaged over the short time horizon by the latest medium-term forecast. It was reminded that the August forecast had seen the annual inflation rate level off in Q3 and then embark on a gradual downward path for three quarters, but relatively fast afterwards, to reach 13.9 percent in December 2022, yet slightly below the mid-point of the target at the end of the projection horizon.
The renewed worsening of the near-term inflation outlook continued to be attributable to global supply-side shocks, Board members underlined. They noted that the major drivers were further the faster growth rates anticipated over the following months for the prices of natural gas and electricity – inter alia amid the changes made to the electricity price capping scheme –, as well as for food prices. The latter was seen to be influenced by the hefty advance in agri-food commodity prices, owing to the war in Ukraine and the associated sanctions, but also to the protracted and widespread drought in Europe during the summer. Additional influences were also expected from administered prices, whereas disinflationary base effects, albeit relatively modest, would occur inter alia for fuels, given also the recent extension of the motor fuel price compensation scheme.
It was observed that, under the circumstances, the additional inflationary effects – both direct and indirect – of global supply-side shocks would continue to affect in the near run both the evolution of exogenous CPI components and core inflation dynamics, with a somewhat higher intensity than presumed in August, but much lower than in the first part of the year.
At the same time, it was agreed that the impact exerted by energy and fuel price capping and compensation schemes remained difficult to foresee. Furthermore, the overall balance of supply-side risks to the inflation outlook was further tilted to the upside, at least in the short run, amid the war in Ukraine and the associated sanctions, as well as given the 2022 drought. Nevertheless, relatively steeper downward corrections in some international commodity prices, agri-food included, as well as somewhat more obvious improvements across global production and supply chains were also possible.
Moreover, it was observed that the cyclical position of the economy was envisaged to exert modest inflationary pressures and abating in the near run, although stronger than previously anticipated, as the new assessments pointed to a marked slowdown in economic growth in H2 – under the impact of the escalating war in Ukraine and the broadening of the associated sanctions –, yet after much faster-than-expected GDP growth in Q2 as well. The evolutions rendered it likely for excess aggregate demand to shrink more visibly during H2, but run higher than forecasted in August 2022. Developments also implied a significant pick-up in annual GDP growth in Q3, followed by only a mild reduction in dynamics during Q4, amid some base effects, Board members remarked.
According to high-frequency indicators, private consumption developments were, however, expected to significantly curb the annual GDP growth in Q3, while major expansionary influences were anticipated from the rebound in the dynamics of gross fixed capital formation, mainly on account of construction works, Board members noted. At the same time, net exports could have a smaller negative contribution to annual GDP dynamics, as the annual change in exports of goods and services had diminished only marginally in July, whereas that in imports had risen slightly, inter alia amid unfavourable developments in external prices. Those resulted, however, in the renewed step-up in the high annual increase in the trade deficit versus the Q2 average and especially in the current account deficit dynamics, which also reflected a worsening of developments in the secondary income balance during that month.
The escalation of the war in Ukraine and the related increasingly harsh 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 potential more severe influences on the European/global economy and the risk perception towards economies in the region, with an unfavourable impact on financing costs.
Against that background, 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, 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 the global supply-side shocks, compounded by the war in Ukraine.
Major uncertainties and risks were, however, further associated with the fiscal policy stance as well, Board members agreed. They referred to the characteristics of the budget execution in the first eight months of the year and to the requirement for further fiscal consolidation amid the excessive deficit procedure and the overall tightening trend of financing conditions. At the same time, they highlighted the current challenging economic and social environment domestically and globally, as well as the implemented or envisaged packages of support measures for households and firms, likely to affect budget parameters. From that perspective, the coordinates of the upcoming budget revision in 2022 were deemed particularly important.
Board members were of the unanimous opinion that the reviewed context overall called for a 0.75 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. They underlined again the importance of the dosage of measures and of the calibration of the monetary policy conduct at the current juncture for effectively anchoring inflation expectations while minimising costs in terms of economic growth, given also the major contractionary effects generated by the sizeable supply-side shocks, the energy crisis in particular, but also the requirement for fiscal consolidation progress.
Moreover, Board members advocated the need to maintain firm control over money market liquidity and 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 6.25 percent from 5.50 percent. Moreover, it decided to raise the lending (Lombard) facility rate to 7.25 percent from 6.50 percent and the deposit facility rate to 5.25 percent from 4.50 percent, as well as to maintain firm control over money market liquidity. 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.