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BNR Board decisions on monetary policy

The Board of the National Bank of Romania (BNR), having convened for the meeting of 5 October 2021, decided:


  • to increase the monetary policy rate to 1.50 percent per annum, from 1.25 percent per annum, as of 6 October 2021;

  • to raise the deposit facility rate to 1.00 percent per annum, from 0.75 percent per annum, and the lending (Lombard) facility rate to 2.00 percent per annum, from 1.75 percent per annum, as of 6 October 2021;

  • 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 4.95 percent in July from 3.94 percent in June, while in August it reached 5.25 percent, exceeding significantly the upper bound of the variation band of the target and running mildly above the forecast. The increase was driven almost entirely, during this period too, by exogenous CPI components, particularly by the considerable hike in natural gas and electricity prices in July and, to a lower extent, by the further rise in fuel prices, mainly on account of the non-petrol-diesel subgroup.


The annual adjusted CORE2 inflation rate went up to 3.0 percent in July, from 2.9 percent in June, and to 3.2 percent in August, thus coming slightly above the forecast. Its evolution reflects primarily the effects of the rising prices of some commodities, including agri-food items, and higher energy and transport costs, as well as the influences of the increased demand for goods and services, overlapping those of supply-side constraints, alongside the upward adjustments of short-term inflation expectations.


Average annual CPI inflation rate and average annual inflation rate calculated based on the Harmonised Index of Consumer Prices climbed to 3.3 percent and 2.6 percent, respectively in August, from 2.9 percent and 2.4 percent, respectively in June 2021.

Economic activity continued to expand in 2021 Q2, at a relatively slower quarterly pace (1.8 percent compared to 2.5 percent in Q1), but somewhat brisker than anticipated, moderately exceeding its pre-pandemic level. The evolution makes it likely for the aggregate demand surplus to increase during this period in line with the latest medium-term forecast. At the same time, amid the base effect associated with the sharp economic contraction in the same year-earlier period, the annual growth rate of economic activity went up to 13.0 percent in Q2 from -0.2 percent in Q1.


All major aggregate demand components contributed to the abrupt pick-up in annual GDP dynamics, albeit to a considerably different extent. The main determinant was private consumption – whose advance was however lower than expected in annual terms – its contribution being closely followed by the change in inventories. A positive contribution, albeit much more modest, was made by gross fixed capital formation, in the context of renewed markedly faster growth in new construction works, mainly on account of residential construction works, which outweighed the impact of the notable decline in the dynamics of net investment in equipment (including transport equipment).


Furthermore, the negative contribution of net exports to annual GDP dynamics decreased in Q2, given that the sharply faster change in exports of goods and services, also amid a base effect, outpaced that in imports thereof. The widening of the trade deficit accelerated however in annual terms, while the annual dynamics of the current account deficit slowed down considerably versus Q1, under the impact of a relative improvement in income balances, remaining nevertheless above the average values recorded in 2019 and 2020.


According to the recent developments in high-frequency indicators, the economy saw a slightly faster quarterly increase in Q3, but solely on account of much better agricultural performance, which, in the context of the base effect associated with the strong rebound in the same year-earlier period, implied a modest decline in the annual GDP dynamics.


It is worth mentioning that the annual dynamics of retail trade, the motor vehicles and motorcycles segment and market services to households stayed at an elevated level in July, yet considerably lower than in Q2. Industrial output and the new orders in manufacturing reported, however, a markedly slower increase against the same year-earlier period, while the construction activity saw a mild drop in annual terms. Turning to exports of goods and services, their annual change declined significantly in July, much more swiftly than that of imports, which triggered a fast acceleration in the annual increase in trade deficit. Against this background, the current account deficit continued to widen, exceeding January through July overall by more than 70 percent the level recorded in the same year-ago period.


Looking at the financial market, key interbank money market rates remained in July close to their nearly four-year lows, before posting upward adjustments in August and especially September, amid the relative tightening of liquidity conditions, but also the consolidation of expectations on a policy rate hike in the near future. Against this backdrop, as well as following global financial market developments, yields on government securities witnessed a steeper upward path in the latter part of Q3, particularly for the medium and long maturities. At the same time, the EUR/RON exchange rate saw a relatively fast correction of the decline recorded in the first part of Q3 under the influence of seasonal factors, and then continued to trend moderately upwards, inter alia amid the interest rate differential and heightening tensions on the domestic political scene.

The annual growth rate of credit to the private sector climbed more firmly in the two-digit range during the first two months of 2021 Q3, averaging out at 12.7 percent from 9.8 percent in Q2, due to the unprecedented step-up of lending in local currency in July, including with the support of government programmes, but also to the moderate pick-up in the dynamics of foreign currency credit. Hence, the leu-denominated component saw its pace of increase accelerate further, to a five-year high of 17.4 percent July through August, from 15.2 percent in Q2, its share in total private sector credit widening to 71.3 percent in August.


The current assessments indicate the outlook for the annual inflation rate to rise over the short time horizon to significantly higher values than those anticipated previously, under the impact of supply-side shocks. Determining factors are the renewed large hikes anticipated for energy prices, particularly of natural gas, owing to the surge in domestic and European wholesale prices and, to a smaller extent, in fuel prices, mainly on the back of the non-petrol-diesel component. They are conducive to a larger and protracted positive deviation of the annual inflation rate from the upper bound of the variation band of the target, while subsequently generating significant disinflationary base effects.


The fourth pandemic wave and the related containment measures pose increased uncertainties and risks to the forecasts, at least in the near run, given the quick worsening of the health situation and the very low level of vaccination on the domestic front, with a potential negative impact on labour market developments as well, which were obviously improving until recently.


Significant uncertainties and risks also stem, however, from the future fiscal policy stance, given especially the coordinates of the recent budget revision and the potential protraction of domestic political instability, likely to jeopardise budget consolidation – vital for macroeconomic stability. A source of uncertainties and risks remains the absorption of European funds, especially those under the Next Generation EU programme. Important from this perspective is the completion of the approval of the National Recovery and Resilience Plan, as well as of the legal and technical procedures underlying the commitment of funds.


In addition, significant risks are further posed by developments in commodity prices, particularly of energy and agri-food, as well as by bottlenecks in production and supply chains, likely to accelerate global inflation.


In the meeting held today, 5 October 2021, based on the currently available data and assessments, and in light of the elevated uncertainty, the BNR Board decided to increase the monetary policy rate to 1.50 percent per annum, from 1.25 percent per annum, as of 6 October 2021, while maintaining firm control over money market liquidity; moreover, it decided to raise the deposit facility rate to 1.00 percent per annum and the lending (Lombard) facility rate to 2.00 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 bring back and maintain the annual inflation rate in line with the 2.5 percent ±1 percentage point flat inflation target, inter alia via the anchoring of inflation expectations over the longer time horizon, in a manner conducive to achieving sustainable economic growth in the context of the fiscal consolidation process, while safeguarding financial stability.


The BNR closely monitors developments in the domestic and international environment and stands ready to use the tools at its disposal to achieve the fundamental objective of price stability in the medium term.


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 15 October 2021 at 3:00 p.m.


In line with the announced calendar, the next monetary policy meeting of the BNR Board is scheduled for 9 November 2021.