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BNR: Board decisions on monetary policy


In its meeting of 15 March 2021, the Board of the National Bank of Romania (BNR) decided the following:


  • 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 CPI inflation rate rose to 2.99 percent in January 2021, from 2.06 percent in December 2020, and to 3.16 percent in February, i.e. well above the previously-expected level, under the transitory impact of the liberalisation of the electricity market for household consumers and following the rise in fuel prices driven by higher oil prices. These developments were only to a small extent counterbalanced by the opposite influences from the VFE segments and tobacco products, as well as from core inflation deceleration.


The annual adjusted CORE2 inflation rate continued to decrease slowly over this period, falling to 3.1 percent in January and staying at this level in February, from 3.3 percent in December 2020. Behind this stood mainly the disinflationary base effects associated with the developments in some processed food prices, to which added the modest influences of the aggregate demand deficit. The dynamics of this component are still marked by the pre-pandemic underlying inflationary pressures, reflecting, inter alia, the associated inflation expectations, along with influences from a rebound in consumption on certain segments, as well as from supply-side disruptions and costs linked with the pandemic and with the measures to prevent the coronavirus spread.


In February 2021, the average annual CPI inflation rate remained flat at the 2.6 percent level reported in December 2020; calculated based on the Harmonised Index of Consumer Prices, the average annual rate continued to decline to 2.1 percent from 2.3 percent in December 2020.


According to the recent statistical data, economic activity saw further a particularly fast recovery in 2020 Q4 – the pace exceeded the forecast and lagged only slightly behind that seen in Q3 – with the annual GDP decline slowing to -1.4 percent from -5.6 percent in Q3, given the 4.8 percent quarterly increase after the 5.6 percent pick-up in the previous quarter. This evolution makes it likely for the aggregate demand deficit to shrink way above expectations at end-2020, which implies a substantial change in the short- and medium-term outlook for the cyclical position of the economy. At the same time, the economic contraction in 2020 came in at only -3.9 percent and excluding the effect of agriculture – due to unfavourable weather conditions –, it would have been -3.3 percent, among the lowest values in Europe.


The upturn owed entirely to domestic demand. Alongside the change in inventories – whose expansionary impact largely counterbalanced the strong contractionary influence seen in the previous quarter –, gross fixed capital formation also played an important part in boosting domestic absorption. Specifically, capital investment gained strong momentum in annual terms amid the markedly faster growth in new construction works, with the contribution, inter alia, from public investment and government programmes.


At the same time, the negative annual dynamics of private consumption increased only marginally, as the impact of the renewed contraction in households’ purchases – attributable mainly to the drop in services, in the context of the resurgence of the pandemic – was almost entirely countered by that of the rise in other sub-components, after their considerable decline in Q3.


The negative contribution of net exports to annual GDP dynamics almost doubled amid a slightly more visible step-up in the dynamics of imports than in those of exports of goods and services, triggering also a renewed increase in the trade deficit versus the same period of the previous year. Under the circumstances, as well as following a more pronounced worsening of the primary income balance owing to dividend distribution flows, the current account deficit saw a larger advance in annual terms, in spite of rising inflows of EU funds to the current account.


Financial market conditions continued to improve following the January 2021 policy rate cut, but later on reflected the influence of heightened global financial market volatility – amid investors’ rising inflation expectations and concerns about the outlook for the Fed’s monetary policy stance –, as well as that stemming from much better-than-expected domestic macroeconomic developments recorded recently, as shown by statistical data.


Thus, key interbank money market rates stuck to a steep downward path until towards end-January, before stabilising slightly above the monetary policy rate, while in the early days of March, they witnessed a visible upward adjustment, amid the tightening of liquidity conditions. In turn, yields on leu-denominated government securities saw renewed hefty declines in January – to a new historical low for 10Y bonds –, which were, however, partly or fully corrected in the latter part of February. Lending rates on the main types of new business to non-bank clients also continued to go down December 2020 through January 2021 or consolidated at their previous low readings.


At the same time, the EUR/RON exchange rate preserved its relative stability until end-February, inter alia amid the interest rate differential, before posting a slight upward adjustment, more modest than those seen in the region.


The annual dynamics of credit to the private sector witnessed a sharper pick-up in December 2020, to 5.5 percent from 4.6 percent in November – as the flow of domestic currency credit increased to a historical high –, and edged down to 5.1 percent in January 2021. The leu-denominated component saw its growth rate step up further in both months, to 8.8 percent in January 2021 against 8 percent in November 2020, amid the recovery of economic activity and as result of government programmes and falling interest rates; thus, in January, its share in total widened to 69.6 percent, a record high for the post-January 1996 period.


In today’s meeting, the BNR Board examined and approved the March 2021 Inflation Report, which incorporates the latest available data and information.

The new scenario shows a change in the inflation outlook versus the previous projection, as the updated path of the forecasted annual inflation rate is revised significantly upwards in the short term and to a smaller extent over the latter part of the projection horizon.


Specifically, the annual inflation rate is anticipated to pick up gradually during 2021 until nearing the upper bound of the target band, under the impact of supply-side shocks, and – after a sizeable downward correction at the beginning of next year – to climb again and remain slightly above the mid-point of the target, amid the earlier reopening of the positive output gap and its subsequent slow widening.


High uncertainties and risks to the new outlook stem, however, from the evolution of the pandemic and of the associated restrictive measures – amid the spread of the third pandemic wave, including domestically –, as well as from the dynamics of vaccination worldwide, but especially across the EU.


Other major sources of uncertainties and risks refer to the fiscal policy stance, in the context of the budget consolidation presumed to be carried out gradually over the medium term, alongside the absorption of European funds allocated to Romania, as well as labour market developments, under the influence of the public health situation and government support measures.


Also relevant, however, are the synchronised uptrends in many commodity prices, as well as the recent heightening of international financial market volatility, accompanied by a broad-based increase in government bond yields, owing to investors’ rising inflation expectations and concerns about the outlook for the Fed’s monetary policy stance.


In the meeting held today, 15 March 2021, based on the currently available data and assessments, and in light of the elevated uncertainty, the BNR Board decided to keep the monetary policy rate at 1.25 percent per annum; 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 BNR Board decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.


The BNR 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 supportive of the recovery of economic activity in the context of fiscal consolidation, while safeguarding financial stability.


The new quarterly Inflation Report will be published on 16 March 2021 at 2:00 p.m. The account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the BNR’s website on 25 March 2021, at 3:00 p.m.


The BNR Board approved the calendar of monetary policy meetings. The next monetary policy meeting of the BNR Board is scheduled for 12 May 2021.