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BNR Board decisions on monetary policy

In its meeting of 5 August 2019, the Board of the National Bank of Romania (BNR) decided the following:

  • 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.

In June 2019, the annual CPI inflation rate went down to 3.8 percent (from 4.1 percent in May), slightly below the forecast, but above the variation band of the target. This owed to the significant drop in the prices of vegetables and fuels. Compared to end-Q1, when it had stood at 4.03 percent, the annual inflation rate decreased owing solely to developments in June. Behind the slowdown versus March stood entirely the exogenous CPI components, especially the dynamics of fuel prices.

By contrast, the annual adjusted CORE2 inflation rate (which excludes from the CPI inflation administered prices, volatile prices, and tobacco product and alcoholic beverage prices) reported faster growth from 2.7 percent in March to 3.3 percent in June. Apart from the impact of the new tax levied on telecom companies and of the hike in some international agri-food prices, the advance mirrors rising demand-pull and wage cost-push inflationary pressures, alongside the upward adjustment of short-term inflation expectations.

The average annual CPI inflation rate continued to decline to 4.1 percent in June from 4.2 percent in May 2019; calculated based on the Harmonised Index of Consumer Prices, the average annual inflation rate went down to 4.0 percent from 4.1 percent December 2018 through May 2019.

The new statistical data confirm the step-up in economic growth to 5 percent in 2019 Q1 from 4.1 percent in 2018 Q4. On the demand side, final consumption continued to be the main driver of economic expansion (4.5 percentage points), ahead of the change in inventories (2.4 percentage points) and gross fixed capital formation, whose positive contribution saw a slight decline versus the previous version (0.6 percentage points). Conversely, net exports had a smaller negative contribution to GDP dynamics amid the revision of the negative differential between the growth rates of exports and imports of goods and services.

The latest statistical data show a slowdown in the annual growth rate of the deficit on trade in goods and services in the first two months of Q2, as well as a faster widening of the current account deficit in annual terms amid the deterioration of the balance on secondary income.

During the same period, mixed developments were reported by consumption, investment and production: an ongoing robust growth, albeit at a mildly slower pace, in retail trade and services, a persistently fast pace of increase in the construction activity, as well as further sluggish dynamics of industrial output, especially in manufacturing.

The annual growth rate of credit to the private sector slowed somewhat to 7.1 percent in June 2019 versus 7.7 percent in Q1 amid the ongoing softening of the dynamics of leu-denominated loans, which, however, stayed solid. Against this background, the share of leu-denominated loans in total private sector credit widened to a post-June 1996 high of 66.6 percent.

In today’s meeting, the NBR Board examined and approved the August 2019 Inflation Report, which incorporates the most recent data and information available. The new forecast reconfirms the outlook for the annual inflation rate to remain above the variation band of the target for the remainder of the year, before returning and staying in the upper half of the band until the end of the forecast horizon, on a path relatively similar to that envisaged previously.

The major uncertainties and risks surrounding the inflation outlook stem from the future stance of fiscal and income policies, while the evolution of the current account deficit is a matter of concern. In addition, the impact that the new benchmark index for loans to consumers (IRCC) will have on lending and the monetary policy transmission mechanism is uncertain. Moreover, there is an increasing number of signs on a worsening of the euro area and global economies and the ensuing uncertainties about their outlook are growing, especially amid the trade war and Brexit. Particularly relevant are the ECB’s and the Federal Reserve’s decisions on monetary policy easing, 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 unchanged the monetary policy rate at 2.50 percent, 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. Furthermore, the central bank maintained the current levels of the minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

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 8 August 2019, 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 12 August 2019, at 3:00 p.m. The next monetary policy meeting of the NBR Board is scheduled for 3 October 2019.

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