In its meeting of 4 July 2018, the Board of the National Bank of Romania decided:
- to keep the monetary policy rate at 2.50 percent per annum;
- to leave unchanged the deposit facility rate at 1.50 percent per annum and the lending facility rate at 3.50 percent per annum;
- to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The annual CPI inflation rate rose to 5.22 percent in April and 5.41 percent in May (from 4.95 percent in March), thereby standing above the projected level. Behind this development stood supply-side factors, the larger-than-expected hikes in fuel prices and tobacco product prices in particular.
The annual adjusted CORE2 inflation rate (which excludes from the CPI inflation a number of prices on which monetary policy has limited or no influence, i.e. administered prices, volatile prices, and tobacco and alcoholic beverage prices) fell, however, in May to 2.95 percent, from 3.09 percent in April, sliding below the March reading of 3.05 percent. The slowdown can be ascribed to processed food and services components, under the impact of slacker growth in international prices of some agri-food items and the movements in the EUR/RON exchange rate.
In April, the average annual CPI inflation rate stood at 2.8 percent and in May at 3.3 percent, compared with 2.5 percent in March; calculated based on the Harmonised Index of Consumer Prices, the annual average came in at 2.2 percent in April and at 2.6 percent in May, from 1.9 percent in March.
Data on first-quarter economic growth point to a sharper-than-anticipated loss of momentum, with annual GDP dynamics slowing to 4 percent, from 6.7 percent in the final quarter of 2017. Household consumption was further the chief driver of growth, its contribution, however, shrinking considerably. Gross fixed capital formation continued to have a positive contribution, albeit lower from the previous period. By contrast, the contribution of net exports to the advance in real GDP improved, given the narrowing of the positive differential between the annual growth rate of imports and that of exports. Against this background, the current account deficit posted a slower pace of increase against the same year-ago period, while remaining at an elevated level.
The latest statistical data show a deceleration in the annual growth of industrial output in April compared with 2018 Q1 and a pick-up in the annual rate of increase of activity in trade and services. Annual dynamics of unit wage costs in the industrial sector gathered further momentum, mirroring a slower advance in labour productivity.
Monetary conditions were less accommodative May through June, amid the increase in relevant money market rates and in credit institutions’ interest rates in relation to non-bank clients, as well as the relative stability of the leu exchange rate.
The annual growth rate of credit to the private sector remained robust in Q2 (6.8 percent in April and 6.4 percent in May), outpacing the average dynamics recorded in the previous quarter. The stronger momentum was mainly attributable to the firming of the high dynamics of leu-denominated loans to households, driven by consumer credit, whose flow peaked at a historical high. The domestic currency component further widened its share in total credit to 64.7 percent, against a low of 35.6 percent in 2012.
The latest assessments reconfirm the outlook for the annual inflation rate to level off above the variation band of the target over the next months, followed by its decline near the upper bound of the variation band at the end of this year, in line with the May 2018 medium-term forecast.
The uncertainties and risks surrounding the medium-term inflation outlook are significant. They stem from labour market conditions, developments in administered prices and in oil prices, as well as from international financial market volatility. Also relevant are the economic growth pace in the euro area and globally and the danger of escalating trade protectionism.
Based on the currently available data and with a view to ensuring the adequate dosage and pace of adjustment of the monetary policy stance, the Board of the National Bank of Romania decided to keep unchanged the monetary policy rate at 2.50 percent per annum; moreover, the NBR Board decided to leave unchanged the deposit facility rate at 1.50 percent per annum and the lending (Lombard) facility rate at 3.50 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 and amid safeguarding financial stability. The NBR Board underlines that the balanced macroeconomic policy mix and the implementation of structural reforms designed to foster the growth potential over the long term are of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand potential adverse developments.
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 11 July 2018, at 3:00 p.m.
The next monetary policy meeting of the NBR Board is scheduled for 6 August 2018, when a new quarterly Inflation Report is to be examined.