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BNR Board decisions on monetary policy

In its meeting of 7 July 2021, the Board of the National Bank of Romania (BNR) decided:


  • 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 went up to 3.24 percent in April 2021 from 3.05 percent in March, whereas in May it rose to 3.75 percent (slightly above the forecast), exceeding the upper bound of the variation band of the target. The increase owed almost entirely to the exogenous CPI components, particularly the hike in fuels prices amid higher oil prices.


In April 2021, the average annual CPI inflation rate remained flat at the 2.6 percent level reported in December 2020, going up to 2.8 percent in May. Calculated based on the Harmonised Index of Consumer Prices, the average annual rate rose to 2.2 percent in April and to 2.3 percent in May from 2.1 percent in March.   


The annual adjusted CORE2 inflation rate stayed below 3 percent, moving up in April and remaining at 2.9 percent in May versus 2.8 percent in March 2021.

Economic activity continued to rebound in 2021 Q1 at a considerably faster pace than anticipated, albeit slower than in the previous quarter, thus recovering almost entirely the loss incurred in 2020 Q2.


Specifically, the economy declined in annual terms at a slower pace of only -0.2 percent compared to -1.4 percent in 2020 Q4, given its 2.8 percent quarterly growth. In light of this evolution, a positive output gap is likely to re-open in 2021 Q1, two quarters earlier than in the latest medium-term forecast.


Looking at annual developments, in 2021 Q1, the recovery was further driven by domestic demand. This time around, the major determinant was private consumption, which saw a notable rebound, mainly due to the strong revival in purchases of goods and services, but also on account of other sub-components. In turn, gross fixed capital formation had a larger positive contribution to annual GDP dynamics, which came therefore to prevail, given the significantly faster increase in this component amid the leap taken by the change in net investment in equipment (including transport equipment), outpacing the impact of the significant loss of momentum seen by new construction works.


Conversely, the negative contribution of net exports recorded a significant pick-up, following a swifter growth rate of imports of goods and services than of exports thereof, entailing also a more pronounced widening of the trade deficit compared to the same period of the previous year. Against this backdrop, but also in the wake of the notable worsening of the primary and secondary income balances – on the back of flows of reinvested earnings and, to a small extent, of net inflows of EU funds –, the current account deficit recorded the largest widening in annual terms in 14 quarters.


According to the latest developments in high-frequency indicators, the economy continued to increase in 2021 Q2, at a slower quarterly pace, which – given the base effect associated with the severe contraction in the same year-ago period – implies nevertheless an increase to a significant two-digit level in the annual GDP dynamics.


Mention should be made of the particularly large increases recorded in April 2021 against April 2020 by retail trade (motor vehicles and motorcycles sales included) and especially by market services to households. At the same time, in April, industrial output expanded considerably in annual terms, coming to exceed by 3 percent the pre-pandemic level, with manufacturing output standing 3.9 percent higher; new orders in manufacturing saw an even sharper rise, whereas the volume of construction works posted again a markedly faster growth in annual terms.


Moreover, the year-on-year advance in trade deficit posted a mild slowdown, as the significant pick-up in exports outpaced that in imports of goods and services. The annual growth rate of current account deficit decelerated, however, much faster, due, inter alia, to the primary and secondary income balances; the dynamics remained nevertheless above the average values seen in 2019 and 2020.


Looking at the financial market, relevant interbank money market rates witnessed further slight declines in May and June, while government security yields stuck to a slowly downward path at the shorter end of the maturity spectrum and posted moderate upward adjustments across longer maturities. Lending rates on the main types of new business to non-bank clients extended or steepened their downtrend April through May 2021, thus falling to very low values from a historical perspective.


At the same time, after the mild increase in the first part of April, the EUR/RON exchange rate tended to stabilise at the new readings, inter alia amid the interest rate differential .


The annual growth rate of credit to the private sector stepped up considerably in the first two months of 2021 Q2, climbing to 10.1 percent in May, its average for the period overall advancing to 9.2 percent from 5.7 percent in Q1. These developments reflected both a base effect and the hefty contribution of the credit flow, amid the further solid economic growth and the generally downward trend in interest rates, to which added the government programmes, whose contribution rose slightly against the previous two months, although remaining modest. Hence, the leu-denominated component saw its annual dynamics pick up to 14.5 percent April through May, from 10.0 percent in Q1, its share in total private sector credit widening to 70.6 percent in May, a record high for the post-January 1996 period .


The latest assessments indicate the outlook for the annual inflation rate to rise over the short time horizon to higher values than those in the latest medium-term forecast, published in the May 2021 Inflation Report, under the stronger transitory impact of supply-side factors. Determining factors are the larger hikes in energy prices, particularly of natural gas and electricity.


At the same time, developments in the pandemic and in the associated restrictive measures continue to generate considerable uncertainties and risks to the inflation outlook, at least in the short run, amid the pace of vaccination slowing markedly on the domestic front and the more contagious (Delta) coronavirus variant tending to spread in some European countries.


Sources of uncertainties and risks also remain the fiscal policy stance and the absorption of European funds, especially those under the Next Generation EU programme. Important from this perspective are the upcoming budget revision and the budget consolidation strategy presumed to be prepared by this autumn, in line with European institutions' recommendations, as well as the approval by the EC of the National Recovery and Resilience Plan.


On the labour market, recent developments are more favourable than anticipated, also in terms of hiring intentions, but uncertainties linger about the prospects for the epidemiological situation and the implications of suspending government support schemes. Additional risks stem from the synchronised uptrends in many commodity prices, likely to accelerate inflation globally.


In the meeting held today, 7 July 2021, based on the currently available data and assessments, and in light of the elevated uncertainty, the NBR 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 NBR Board decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.


The NBR 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 conducive to achieving sustainable economic growth in the context of fiscal consolidation, while safeguarding financial stability.

The NBR is 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 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 19 July 2021, at 3:00 p.m.


In line with the announced calendar, the next monetary policy meeting of the NBR Board is scheduled for 6 August 2021, when a new quarterly Inflation Report is to be examined.

(Source: bnr.ro)