Banca Naţională a României

The annual inflation rate continued to rise in the first two months of 2017 Q4, up to 2.63 percent in October from 1.77 percent in September and to 3.23 percent in November, standing below the upper bound of the variation band of the target, but higher than the forecast.

The advance in the prices of consumer goods and services was almost across the board, with nearly all CPI components contributing to the step-up in inflation. Behind this evolution stood primarily supply-side factors, the main influence coming from administered prices, as a result of the increase in electricity price, as well as from fuel prices, in the context of the hike in the excise duty on motor fuels and of the higher international oil prices.

The adjusted CORE2 component also made a considerable contribution, given that its annual rate saw a rapid pick-up from 1.82 percent in September to 1.95 percent in October and to 2.3 percent in November. Apart from the external influences on the processed food segment, the faster growth in core inflation reflected inflationary pressures stemming from the cyclical position of the economy and from the dynamics of unit wage costs, as well as the effects of the behaviour of the leu exchange rate.

The average annual CPI inflation rate consolidated in positive territory at 1.0 percent in November 2017 (0.7 percent in October) from 0.4 percent in September; calculated based on the Harmonised Index of Consumer Prices, the annual average increased to 0.9 percent in November 2017 (0.6 percent in October) from 0.5 percent in September.

In 2017 Q3, economic growth continued to accelerate significantly, exceeding expectations. The annual dynamics of real GDP reached 8.8 percent (from 6.1 percent in the previous quarter). The driver of this evolution was household consumption (8.2 percentage points) whose annual dynamics rose markedly to 12.3 percent from 7.3 percent in the previous quarter. A significant positive contribution was made – for the first time in six quarters – by gross fixed capital formation (2.3 percentage points) whose annual pace of increase came in at 8.8 percent.

The negative contribution of net exports to GDP doubled (to -1.2 percentage points) amid a stronger deceleration in the annual growth rate of exports of goods and services than in that of imports; the change in inventories also made a negative contribution (-0.7 percentage points).

Looking at the supply side, GDP growth had an almost across-the-board support. The tertiary sector made further the largest contribution, followed by agriculture, which posted the highest rate of increase in four years.

Statistical data for October 2017 point to a strengthening of the uptrend seen in industrial output throughout the year and to further high growth rates of the activity in trade and services, amid the persistence of stimulative conditions on the labour market and from the income policy. The trade balance continued to post unfavourable developments, ending the first ten months of the year on a deficit of EUR 9.4 billion, higher than that for the entire 2016.

In 2017 Q4, real monetary conditions were slightly less accommodative, given the significant increase in the relevant interbank money market rates. The annual growth rate of credit to the private sector slowed only marginally in the first two months of Q4 (6.8 percent in November) and was primarily underpinned by the leu-denominated component and by developments in loans to households. The share of leu-denominated credit in total private sector loans widened to 61.8 percent, certifying and ensuring an improvement in monetary policy transmission.

The latest assessments indicate the outlook for the annual inflation rate to pick up further in the months ahead, mainly due to supply-side factors, as well as to rising pressures from fundamentals, overlapping in the early months of 2018 the inflationary base effects associated with the indirect tax cuts and removals and with the decline in administered prices.

The uncertainties and risks surrounding the inflation outlook stem mainly from the fiscal and income policy stance, the volatility of international oil prices, and from the pace of euro area and global economic growth, also amid a slow normalisation of the monetary policy pursued by the major central banks.

In light of these assessments, the Board of the National Bank of Romania decided to increase the monetary policy rate to 2.00 percent per annum from 1.75 percent per annum; moreover, the NBR Board decided to raise the deposit facility rate to 1.00 percent per annum and the lending (Lombard) facility rate to 3.00 percent per annum. In addition, the NBR Board decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The NBR Board decisions aim to ensure and preserve price stability over the medium term in a manner conducive to achieving sustainable economic growth. The NBR Board underlines that the balanced macroeconomic policy mix and progress in structural reforms are of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand potential adverse developments.

The NBR is closely monitoring domestic and external developments and stands ready to use all its available tools.

According to the NBR Board decision, the account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the NBR website on 15 January 2018, at 3:00 p.m.

In line with the announced calendar, the next monetary policy meeting of the NBR Board is scheduled for 7 February 2018, when a new quarterly Inflation Report is to be examined.