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; Eugen Nicolăescu, Board member and Deputy Governor of the National Bank of Romania; Liviu Voinea, Board member and Deputy Governor of the National Bank of Romania; Marin Dinu, Board member; Daniel Dăianu, Board member; Gheorghe Gherghina, Board member; Ágnes Nagy, Board member; and 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 price developments, Board members noted that the annual inflation rate had posted a faster decline in the first two months of 2018 Q4, falling to 4.25 percent in October from 5.03 percent in September and to 3.43 percent in November, i.e. below the forecast and inside the variation band of the flat target. As expected, the sizeable downward correction had owed mainly to the disinflationary base effects which, during that period, had strongly marked the dynamics of volatile and administered prices and, to a lesser extent, the change in tobacco product prices. Additional influences had stemmed from the decreases seen in November by fuel prices and prices of fruit and vegetables.
It was pointed out that core inflation had also contributed to the correction, given that the annual adjusted CORE2 inflation rate had seen a slightly steeper downward path, in line with forecasts, to reach 2.5 percent in November. The deceleration had once again been bolstered mainly by processed food items and, to some extent, by services, thus being considerably attributable to the base effects associated with the hike in some agri-food prices towards the end of 2017 and the relative strengthening of the leu against the euro in November.
Some Board members underlined that inflation developments in 2018 had validated the NBR forecasts and the central bank’s monetary policy conduct which had not overreacted to the significant rise seen by the annual inflation rate in the summer months.
The overall developments in core inflation and of some sub-components continued to indicate demand-pull inflationary pressures – reflecting the evolution of the cyclical position of the economy, in spite of the reduced pick-up in purchases of goods and services in Q3, carrying the potential to affect retailers’ price policy. The annual dynamics of unit labour costs economy-wide had remained in the two-digit range in Q3, decelerating however against Q2, and the GDP deflator had been further almost unchanged, while short-term inflation expectations had relatively risen.
As for the cyclical position of the economy, Board members showed that, in Q3, economic growth had posted a slight step-up in annual terms – to 4.3 percent from 4.1 percent in 2018 Q2 –, and especially in quarterly terms, solely on account of agricultural output increasing way above expectations. The evolution was deemed to make it likely for potential GDP to temporarily increase and for the significant excess aggregate demand to see a near-halt in its rise and thus stand marginally below the forecast for that period. Moreover, it was remarked that, on the demand side, the major contributor to GDP growth had been further the change in inventories and that the relatively higher contribution made by household consumption was entirely attributable to the considerable pick-up in self-consumption. Gross fixed capital formation had also made a lower negative contribution to the dynamics of economic expansion. By contrast, the negative contribution of net exports had slightly risen amid a relatively faster slowdown in the growth rate of exports of goods and services, which, alongside the worsening of the primary and secondary income balances, had led to a swifter rise in the current account deficit from the same year-earlier period.
At the same time, Board members remarked that tensions on the labour market had continued to grow in Q3, reaching post-crisis highs, in the context of a slightly faster decline in the ILO unemployment rate to a new historical low of 3.9 percent; in addition, the number of employees economy-wide had touched new peaks, including in October, mainly on account of developments in the private sector. Reference was also made to the strong employment intentions (albeit more moderate as against 2018 Q4) highlighted by surveys for the first months of 2019, as well as to the high emigration rate and the skill mismatch – a mix likely to heighten pressures on wages. In that context, mention was made of a further two-digit annual growth rate of average gross nominal wage earnings in Q3 and in October, as well as of the rise in the dynamics of the average real net wage earnings, given the drop in inflation; moreover, discussions touched upon the annual growth rate of unit wage costs in industry resuming an upward path in October, after the halt seen in the course of Q3.
Relative to monetary conditions, Board members showed that the spread between the key interbank money market rates and the monetary policy rate had gradually narrowed over the last two months of 2018, mainly amid the change in liquidity conditions, the inflation dynamics and the likely adjustment in banks’ expectations on the evolution of some monetary policy parameters. The spread was deemed to have remained, however, substantial, the same as the interest rate differential, which had further supported the attractiveness of investments in the domestic financial sector, also reflected by the relative stability of the EUR/RON exchange rate until towards end-2018, even amid a widening current account deficit. Yet, reference was made to the heightened risks arising, in that context, from a possible sudden change in the global financial market sentiment or in investor risk perception vis-à-vis the local economy and financial market.
It was observed that, in the first two months of 2018 Q4 overall, the advance in credit to the private sector had continued at a sustained pace, marginally above the Q3 average. Behind those developments had stood the relative recovery in the dynamics of credit to non-financial corporations – on account of the foreign currency component –, as well as the further robust increase in loans to households, amid a slightly faster pick-up in credit for consumption, other purposes and business expansion, counterbalanced by the slowdown seen by housing loans, whose annual dynamics had stuck nonetheless to two-digit levels. The leu-denominated component had further made the prevailing, albeit declining, contribution to the dynamics of private sector credit, its share in total widening to 65.6 percent in November.
As regards future developments, based on the latest data and analyses, Board members shared the view that the annual inflation rate would probably decline further and thereafter remain over the very short time horizon slightly below the upper bound of the variation band of the target, in line with the medium-term forecast published in the November 2018 Inflation Report, which anticipated its drop to 2.9 percent in December 2019. It was noted that the decline would continue to be driven by supply-side factors, given the relatively heftier disinflationary influences expected to stem, during that period as well, from developments in volatile prices, i.e. VFE and fuels. However, those influences would probably be offset starting January 2019 by the effects of the higher excise duty on cigarettes, a context in which the overall disinflationary contribution of exogenous CPI components might fade over the near time horizon. In some Board members’ opinion, the action of supply-side factors might even turn inflationary again in the near run, assuming a higher-than-expected increase in the prices of some food items or in the prices of some services and utilities, also as a result of the fiscal and budgetary measures in force since the beginning of the current year, the context therefore remaining relevant in terms of implications on medium-term inflation expectations.
Analysing the outlook for the influence of fundamentals, Board members concluded that, according to the new data and assessments, economic growth would probably remain robust over the short term, with quasi-stable annual dynamics in 2018 Q4 and a slight step-up in 2019 Q1. In quarterly terms, the economic advance was anticipated to decelerate markedly in 2018 Q4 – owing exclusively to the likely contraction in agricultural output after the exceptional rise seen in the previous period –, before gaining momentum in 2019 Q1. It was considered that those developments would probably determine a widening of the positive output gap during the two quarters, to values only marginally below those in the medium-term forecast.
At the same time, Board members observed that, according to the latest developments in high-frequency indicators, private consumption had probably become again the main driver of economic growth in 2018 Q4, whereas gross fixed capital formation may have made a more negative contribution to GDP dynamics. In the case of net exports, however, a reduction in their negative contribution was more likely, given the relative slowdown in October in the annual pace of increase of the trade deficit, even amid the wider negative differential between the annual growth rate of exports of goods and services and that of imports thereof; in turn, the annual increase in the current account deficit moderated slightly, also due to an improvement in the primary and secondary income balances.
Board members deemed that, in the analysed context, which included imponderables from the external environment, the uncertainties and risks surrounding the latest medium-term forecast were substantially on the rise. A major source was the fiscal and income policy stance, given inter alia the still pending 2019 budget and the contents of the fiscal and budgetary measures effective 1 January 2019.
It was remarked that an assessment as comprehensive as possible of the implications of those measures on the short- and medium-term outlook was warranted. Some Board members cautioned that they could have significant short- and medium-term effects on economic activity, but also on the economy’s growth potential, both via the fiscal impulse and the composition of budget spending, and by affecting the investment and consumption behaviour.
Attention was given to the tax on credit institutions’ financial assets, with discussions touching on the characteristics and possible implications for monetary policy and lending, as well as for financial stability and macro-stability in general. Among others, Board members were of the opinion that setting the tax depending on ROBOR rates impaired the effectiveness and flexibility of monetary policy, and implicitly the central bank’s capacity to keep inflation under control, all of which had proven essential in bringing the annual inflation rate back inside the variation band of the target in 2018. Moreover, it was shown that the adverse effects of the tax might be compounded by those of the recently approved legislative initiatives on the banking sector, whose provisions were likely to affect lending and monetary transmission, but also banks’ stability, as well as the economy’s external financing costs. Some Board members suggested that the National Committee for Macroprudential Oversight be convened in order to examine the effects of the new measures regarding the banking system and to make recommendations to public authorities.
It was deemed that rising uncertainties stemmed from the external environment amid the slower pace of euro area and global economic growth, to which added the heightened risks to growth prospects posed by the trade row and the UK’s exit from the EU, as well as by the tightening trend of financial conditions and the international financial market volatility. Reference was also made to the monetary policy stance of the ECB and of other major central banks, and to the probable stance of central banks in the region.
Against that background, Board members underlined again the need for a balanced macroeconomic policy mix to avoid the overburdening of monetary policy, with undesired effects in the economy. Moreover, the importance of an adequate dosage and pace of adjustment of the monetary policy stance was reiterated, from the perspective of anchoring inflation expectations and maintaining the annual inflation rate on the trajectory shown by the NBR’s latest medium-term forecast, while safeguarding financial stability.
Under the circumstances, the NBR Board unanimously decided to keep unchanged the monetary policy rate at 2.50 percent, the deposit facility rate at 1.50 percent and the lending (Lombard) facility rate at 3.50 percent. In addition, the NBR Board unanimously decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.