NBR Board decisions on monetary policy

NBR Board decisions on monetary policy

The annual CPI inflation rate went up in December 2019 to 4.0 percent from 3.8 percent in November, i.e. above the variation band of the flat target and slightly higher than the forecast.

The annual CPI inflation rate went up in December 2019 to 4.0 percent from 3.8 percent in November, i.e. above the variation band of the flat target and slightly higher than the forecast. The rise versus end-Q3, when it dropped to 3.5 percent, owes mainly to the faster dynamics of fuel prices, inter alia amid a base effect, but also to the notable hike in fruit prices, as well as to the acceleration in core inflation.

The annual adjusted CORE2 inflation rate (which excludes from the CPI inflation administered prices, volatile prices, and tobacco product and alcoholic beverage prices) continued to increase in December to a higher-than-forecasted level, reaching 3.7 percent from 3.5 percent in November and 3.4 percent in September. The advance reflected almost entirely the trend seen on the food segment, affected by the rise in some international agri-food prices, which overlapped with the significant inflationary pressures from demand and unit labour costs.

In December, the average annual CPI inflation rate remained at the 3.8 percent level reported in November; calculated based on the Harmonised Index of Consumer Prices, the average annual rate picked up to 3.9 percent from 3.8 percent in October and November.

The new statistical data reconfirm the deceleration in the annual pace of economic growth to 3 percent in 2019 Q3 from 4.4 percent in the previous quarter. On the demand side, the contribution of household consumption posted a stronger decline to 2.6 percentage points compared to the previous estimate (3 percentage points) from 3.8 percentage points in Q2, whereas the contribution of gross fixed capital formation to GDP growth widened according to the revised data to 6.3 percentage points (compared to 5.9 percentage points from 3.9 percentage points in Q2). Conversely, net exports saw their negative contribution to GDP dynamics rise, given the more pronounced reacceleration in the growth of imports relative to that of exports of goods and services.

The latest statistical data point to mixed developments for consumption, investment and production October through November: on the one hand, a further robust advance in retail sales and a faster annual growth rate of services to households, as well as a further swift rise in the volume of construction works, albeit mildly slower, and on the other hand, a larger contraction in industrial production and falling new orders in manufacturing.

Moreover, the most recent balance-of-payments data highlight the slower year-on-year worsening of the trade balance in October-November versus Q3, in the context of a sharper decline in the growth rate of imports compared to that of exports of goods and services. The current account deficit continued to widen, on the back of the deterioration of the primary and secondary income balances, while its coverage by foreign direct investment and capital transfers continued to narrow.

The annual growth rate of credit to the private sector slowed somewhat more visibly in December, to 6.6 percent from 7.2 percent in November, its average for Q4 overall declining to 7.1 percent versus 7.9 percent in Q3. With the advance in the leu-denominated component moderating only slightly and the foreign currency component posting a larger contraction, the share of domestic currency loans in total private sector credit widened further, hitting a post-May 1996 high of 67.6 percent in December.

In today’s meeting, the NBR Board examined and approved the February 2020 Inflation Report, which incorporates the most recent data and information available. The new forecast broadly reconfirms the coordinates of the previous medium-term projection. Thus, the annual inflation rate is expected to decline significantly in the early months of 2020 and stay in the upper half of the variation band of the target until the end of the forecast horizon, on a trajectory resuming a slightly upward movement in the latter part of this year.

Heightened uncertainties and risks surrounding the inflation outlook stem from the future fiscal and income policy stance, especially given the 2020 election calendar, while the level and trend of the current account deficit and of the fiscal deficit are particularly concerning. Rising uncertainties are also generated by the low dynamics of the euro area and global economies, as well as by the growing risks to their outlook, inter alia amid the coronavirus outbreak. Further relevant are also the ECB’s and the Fed’s monetary policy decisions, as well as the stance of central banks in the region.

In today’s meeting, based on the currently available data and assessments, the NBR Board decided to keep the monetary policy rate at 2.50 percent per annum, while maintaining strict control over money market liquidity. 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. Given the developments in foreign currency lending and the adequate level of forex reserves, the NBR Board decided to cut the minimum reserve requirement ratio on foreign currency-denominated liabilities of credit institutions to 6 percent from 8 percent starting with the 24 February – 23 March 2020 maintenance period. The measure also aims to continue the harmonisation of the minimum reserve requirements mechanism with the relevant standards and practices of the European Central Bank and the major central banks across the European Union. The minimum reserve requirement ratio on leu-denominated liabilities remains unchanged at 8 percent.

The NBR Board’s 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 new quarterly Inflation Report will be presented to the public in a press conference on 11 February 2020, 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 14 February 2020, at 3:00 p.m. The next monetary policy meeting of the NBR Board is scheduled for 3 April 2020.