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BNR Board decisions on monetary policy


In its meeting of 12 May 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 inflation rate dropped in March 2021 somewhat less than expected (to 3.05 percent from 3.16 percent in February), given that the decelerations reported by VFE and tobacco product components and the slowdown in core inflation were largely offset, in terms of impact, by the higher-than-expected change in fuel prices.

However, compared to December 2020, when it had declined to 2.06 percent, the annual inflation rate rose notably at the end of 2021 Q1. Behind this stood the transitory impact of the liberalisation of the electricity market for household consumers and the rise in fuel prices driven by higher oil prices, only partly counterbalanced by the disinflationary influences from the VFE and tobacco product segments, as well as from core inflation deceleration.


In line with expectations, the annual adjusted CORE2 inflation rate continued to decrease in 2021 Q1, falling to 2.8 percent in March 2021 from 3.3 percent in December 2020. This was mainly the result of the disinflationary base effects associated with developments in the prices of some processed food items, to which added the modest influences of the aggregate demand deficit and of a slower depreciation in annual terms of the leu against the euro.


Nevertheless, the dynamics of this component are still marked by the pre-pandemic underlying inflationary pressures, reflecting, inter alia, the upside trend of short-term 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 March 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 declined to 2.1 percent from 2.3 percent in December 2020.


The new statistical data reconfirmed the economic growth by 4.8 percent in 2020 Q4 and the slower GDP decline in annual terms to -1.4 percent from -5.6 percent in Q3, implying the considerable absorption of the aggregate demand deficit at the end of the previous year.

The economic activity upturn owed entirely to domestic demand. Apart from the major contribution of the change in inventories, behind the revival in domestic absorption stood also, to a small extent, general government consumption. The positive impact of gross fixed capital formation declined, however, versus Q3, although its annual change posted a mild increase 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 deepened marginally, as the impact of the renewed stronger contraction in households’ purchases – attributable mainly to the drop in services, in the context of the resurgence of the pandemic – was largely offset by that of the rise in other sub-components, after their considerable decline in Q3.


On the other hand, the negative contribution of net exports to annual GDP dynamics increased against the backdrop of a relatively swifter pick-up in imports of goods and services, entailing also a new widening of the trade deficit compared to 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 widened significantly faster in annual terms, in spite of rising inflows of EU funds to the current account.


According to the latest high-frequency indicators, economic recovery carried on in 2021 Q1, but at a much slower pace, amid mixed developments in the structure of aggregate demand and at sectoral level. Thus, retail trade posted a mildly faster increase in annual terms in Q1 and the annual dynamics of motor vehicles and motorcycles sales witnessed a strong return to positive territory January through February; at the same time, market services to households recorded a lower contraction (by almost a half), in annual terms, amid the easing (at least for a while) of some restrictions on the hospitality industry.


During the same period, however, the annual dynamics of the construction activity and industrial output re-entered/moved again slightly deeper into negative territory, alongside a lower positive change in new manufacturing orders, as well as a further contraction, in annual terms, in net direct investment, albeit entirely on the back of intercompany lending. At the same time, the trade deficit saw a faster widening in annual terms amid a more visible re-acceleration of the negative annual dynamics of exports. In turn, the current account deficit widened at a much stronger pace than in the same year-ago period, inter alia, following the marked worsening of the primary and especially the secondary income balance.


Looking at the financial market, relevant interbank money market rates largely corrected in April their increase recorded halfway through the previous quarter. Government security yields also posted significant downward adjustments in April, remaining however visibly above the historically very low readings reached prior to the heightening of international financial market volatility. Lending rates on the main types of new business to non-bank clients also went further down February through March 2021 or consolidated at their previous low values. At the same time, after the upward adjustment in March, the EUR/RON exchange rate continued to rise slowly in the first part of April, before tending to stabilise at the new readings (inter alia amid the interest rate differential).


The annual growth rate of credit to the private sector re-embarked on an upward path in February 2021 and then stepped up to 6.6 percent in March – as the flow of domestic currency loans increased to a historical high –, its quarterly average thus advancing to 5.7 percent from 4.7 percent in 2020 Q4. The leu-denominated component saw its dynamics pick up further, climbing to two-digit readings in March, i.e. 11.3 percent, versus 8.8 percent in January 2021, amid the recovery of economic activity and the downtrend in interest rates, as well as a result of government programmes, whose contribution to the hefty flow of credit in the past two months was, however, marginal. Thus, the share of leu-denominated credit in total widened to 70.1 percent in March, a record high for the post-January 1996 period.


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

The current scenario shows the forecasted annual inflation rate following a relatively higher path over the next two years, as it is again 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 expected to climb visibly above the upper bound of the variation band of the target in 2021 H2, under the stronger transitory impact of supply-side factors, including the steep rise in some commodity prices likely to accelerate inflation globally.


At the onset of 2022, the annual inflation rate is, however, seen returning and remaining afterwards in the upper half of the band, above the values anticipated in March 2021, amid the probably faster widening of the positive output gap after its reopening in 2021 Q3, in the context of relatively swifter economic growth, spurred inter alia by committing EU funds under the Next Generation EU programme.


Considerable uncertainties and risks to the new outlook further stem, however, from the evolution of the pandemic and of the associated restrictive measures, largely dependent on the extent and effectiveness of the vaccination process. Major sources of uncertainties and two-way risks also continue to be the fiscal policy stance, in the context of the budget consolidation presumed to be carried out gradually over the medium term, as well as the absorption of European funds, especially those under the Next Generation EU programme, considering inter alia the still ongoing procedures related to the 2021-2024 Convergence Programme and the National Recovery and Resilience Plan. Uncertainties are also associated with labour market conditions, given the recent positive developments in terms of new jobs and hiring intentions, but also the short-term outlook for government support measures. Also relevant continue to be the synchronised uptrends in many commodity prices.


In the meeting held today, 12 May 2021, based on the currently available data and assessments, and in light of the elevated uncertainty, the BNRBoard 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 BNRBoard decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.


The BNRBoard 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 BNRis closely monitoring domestic and global developments and stands ready to use its available instruments in order to achieve the overriding objective regarding medium-term price stability.


The new quarterly Inflation Report will be published on 14 May 2021 at 12:00 p.m. The account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the NBR’s website on 24 May 2021, at 3:00 p.m.


In line with the calendar, the next monetary policy meeting of the BNRBoard is scheduled for 7 July 2021.