In its meeting of 6 August 2021, the Board of the National Bank of Romania decided:
- to keep the monetary policy rate at 1.25 percent per annum;
- to leave unchanged the deposit facility rate at 0.75 percent per annum and the lending (Lombard) facility rate at 1.75 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 inflation rate continued to rise above the upper bound of the variation band of the target in June 2021, implicitly above the forecast, climbing to 3.94 percent from 3.75 percent in May and 3.05 percent in March 2021.
The pick-up in Q2 owed almost entirely to the exogenous CPI components, similarly to the previous quarter. The main contribution was made by the hike in fuel prices amid higher oil prices, followed by the modest influences coming from the increase in the prices of fruit and vegetables, as well as from the rise in tobacco product prices.
The annual adjusted CORE2 inflation rate stopped its downward trend in 2021 Q2, a little earlier than anticipated, moving up to 2.9 percent in June from 2.8 percent in March 2021. Its evolution reflects the temporary effects of a substantial pick-up in consumer demand, especially in the service segment, overlapping those from supply-side disruptions and costs linked with the increase in the prices of some commodities and with the measures to prevent the coronavirus spread, alongside the influences of the upward adjustment of short-term inflation expectations.
Average annual CPI inflation rate and average annual inflation rate calculated based on the Harmonised Index of Consumer Prices climbed to 2.9 percent and 2.4 percent respectively, from 2.6 percent and 2.1 percent respectively in March 2021.
The incoming statistical data confirm the continued recovery of economic activity in 2021 Q1 at a pace significantly faster than expected; real GDP lowered its decline in annual terms to only -0.2 percent from -1.4 percent in 2020 Q4, given a 2.9 percent quarterly growth, i.e. marginally more pronounced than previously estimated. The evolution implies an almost full recovery in this period of the sharp economic contraction in 2020 Q2, as well as the re-opening of the positive output gap in 2021 Q1, two quarters ahead of the May forecast.
At the same time, domestic demand is confirmed to be the sole driver of the economic upturn, in the context of the strong re-acceleration of private consumption, but also with the contribution of a significantly faster increase in gross fixed capital formation. However, the negative contribution of net exports increased substantially, similarly to the previous estimates, following a swifter pick-up in the growth rate of imports of goods and services than in that of exports thereof, entailing also a more pronounced widening of the trade deficit compared to the same period of the previous year.
Against this backdrop, but also in the wake of the notable worsening of the primary and secondary income balances – on the back of flows of reinvested earnings and, to a small extent, of net inflows of EU funds –, the current account deficit in 2021 Q1 posted the largest widening in annual terms in the past 14 quarters.
According to the recent developments in high-frequency indicators, the economy continued to increase in 2021 Q2, at a slower quarterly pace, yet faster than that anticipated in May, which – given the base effect associated with the contraction in the same year-ago period – implies an increase to a significant two-digit level in the annual GDP dynamics.
In the first two months of Q2, particularly swift dynamics were reported by retail trade, trade in the motor vehicles and motorcycles segment, and especially market services to households, but also by construction and industrial output, including new orders in manufacturing. At the same time, the year-on-year advance in trade deficit posted a mild slowdown, as the significant pick-up in exports, amid the strong revival of European economies, outpaced that in imports of goods and services. However, the annual growth rate of current account deficit decelerated markedly, due, inter alia, to the primary and secondary income balances; the dynamics remained nevertheless above the average values seen in 2019 and 2020.
Looking at the financial market, key interbank money market rates remained relatively flat in July, at nearly 4-year lows, while yields on government securities posted meagre increases or rose at a swifter pace in the first half of the month, before stabilising at the new levels. The average lending rate on new business extended its overall downtrend in June, falling to a very low value from a historical perspective. The EUR/RON exchange rate remained, however, quasi-stable in the first part of July, and subsequently experienced a gradual downward adjustment, mainly on the back of seasonally-driven domestic developments.
The annual growth rate of credit to the private sector continued to pick up in June, reaching 11.2 percent, from 10.1 percent in May, as a result of stronger lending in the local currency, including due to the higher contribution of government programmes. Hence, the annual dynamics of the leu-denominated component advanced to 16.6 percent, against 15.4 percent in May, with its share in the loan stock widening to 71.1 percent in June.
In today’s meeting, the NBR Board examined and approved the August 2021 Inflation Report, which incorporates the latest available data and information.
The current scenario shows a higher path of the projected annual inflation rate over the next two years, with the indicator being again revised considerably upwards in the short term and to a lower extent in the latter part of the projection horizon.
Specifically, the substantial hikes in energy prices – natural gas, electricity and fuels – in July, with a cumulative contribution of about 1 percentage point to the annual CPI dynamics, pushes the annual inflation rate in 2021 H2 above the previously anticipated levels, above the variation band around the target, which is likely to boost and extend the transitory inflationary impact of supply-side factors. At the same time, following the downward corrections in early 2022 driven by base effects, the annual inflation rate is expected to fall and to remain marginally below the upper bound of the band, above the values projected in May 2021, amid the increase to relatively higher levels in the aggregate demand surplus that re-opened earlier than expected in 2021 Q1.
However, the evolution of the pandemic and the related containment measures pose heftier uncertainties and risks to the current forecasts, at least in the short run, given the resumed growth in domestic infections and the marked slowdown in the pace of vaccination, as well as signs of a new pandemic wave in Europe and elsewhere, amid the spread of a more contagious coronavirus variant (Delta).
Sources of uncertainties and risks also remain the fiscal policy stance and the absorption of European funds, especially those under the Next Generation EU programme. Important from this perspective are the coordinates of the upcoming budget revision and the budget consolidation strategy presumed to be prepared by this autumn, in line with European institutions’ recommendations, as well as the approval by the EC of the National Recovery and Resilience Plan. Fiscal/budgetary consolidation is vital for economic stability, for mitigating the impact of inflationary shocks.
On the labour market, developments continued to improve, also compared to expectations, but uncertainties persist about the near-term outlook for the epidemiological situation and the implications of ceasing government support schemes. However, risks stem also from the synchronised uptrends in many commodity prices, likely to accelerate global inflation.
In the meeting held today, 6 August 2021, based on the currently available data and assessments, and in light of the elevated uncertainty, the NBR Board decided to keep the monetary policy rate at 1.25 percent per annum, while preserving tight control over money market liquidity; moreover, it decided to leave unchanged the deposit facility rate at 0.75 percent per annum and the lending (Lombard) facility rate at 1.75 percent per annum. Furthermore, 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 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 the fiscal consolidation process, while safeguarding financial stability.
The NBR closely monitors developments in the domestic and international environment and stands ready to use the tools at its disposal to achieve the fundamental objective of price stability in the medium term.
The new quarterly Inflation Report will be presented to the public in a press conference on 9 August 2021 at 11:00 a.m.
The account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the NBR’s website on 16 August 2021 at 3:00 p.m.
In line with the calendar, the next monetary policy meeting of the NBR Board is scheduled for 5 October 2021.