National Bank of Romania (NBR) Board decisions on monetary policy: rate unchanged at 2,5%, risks stem from new fiscal measures

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2019-02-07 15:32

NBR Board decisions on monetary policy

The annual CPI inflation rate continued to go down in December 2018 to 3.27 percent from 3.43 percent in November, moving deeper into the variation band of the flat target. Thus, the NBR fulfilled its objective of maintaining price stability over the medium term amid a carefully calibrated monetary policy stance.

The December evolution occurred mainly following the drop in fuel prices – amid the international oil price dynamics –, partly offset by the hikes in the prices of fruit and vegetables and those of tobacco products. In turn, the annual adjusted CORE2 inflation rate (which excludes from the CPI inflation administered prices, volatile prices, and tobacco product and alcoholic beverage prices) declined slightly to 2.5 percent from 2.6 percent in November.
In December, the average annual CPI inflation rate remained flat at the 4.6 percent level reported in November; calculated based on the Harmonised Index of Consumer Prices, the average annual rate saw a slight pick-up to 4.1 percent from 4.0 percent in November.
The revised data on 2018 Q3 economic growth confirm the step-up in the annual dynamics of real GDP to 4.4 percent from 4.1 percent in the previous quarter, solely on account of a much higher-than-expected agricultural production. On the demand side, the change in inventories made the largest contribution to GDP growth, ahead of household consumption with increased support from self-consumption and purchases on the agri-food market, whereas gross fixed capital formation had a negative contribution.

The negative contribution of net exports to GDP dynamics expanded compared to the previous data, against the background of a more pronounced slowdown in the growth rate of exports of goods and services than in that of imports. Alongside the worsening of the primary and secondary income balances, this caused a substantial deepening of the current account deficit against the same year-ago period.

The latest developments show a slight deceleration in the annual dynamics of industrial activity in October-November 2018 compared to Q3, down to 3 percent, while the construction sector reported a smaller contraction of -3.9 percent. At the same time, in 2018 Q4, the growth rate of retail purchases saw an upturn to 5.9 percent, lagging, however, behind the dynamics seen in the first half of the year. Furthermore, the trade balance posted a faster deterioration, contributing to the further widening of the current account deficit.

The relevant interbank money market rates and their positive spread vis-à-vis the monetary policy rate re-entered a slightly upward path in mid-January 2019, while the EUR/RON exchange rate posted a more pronounced increase in the latter part of the month; in January as a whole, the leu weakened 1.1 percent versus the euro.
The annual growth rate of credit to the private sector accelerated in December 2018 to 7.9 percent (the fastest rise since May 2012) from 6.3 percent in November. Behind the advance stood mainly the leu-denominated component, whose share in total private sector credit peaked at a 66 percent high since September 1996. However, the level of credit is further low relative to economic activity.

In today’s meeting, the NBR Board examined and approved the February 2019 Inflation Report, which incorporates the most recent data and information available. The new scenario of the projection reconfirms the prospects for the annual inflation rate to decline further during the next three quarters to values even slightly below the previously anticipated ones, before climbing and remaining slightly beneath the upper bound of the target band until the end of the forecast horizon.

The uncertainties and risks related to the inflation outlook stem from the new set of fiscal and budgetary measures effective 1 January 2019, as well as from the still pending draft budget and hence from the future fiscal and income policy stance. Also important are the uncertainties surrounding the pace of euro area and global economic growth, the international oil price developments, the monetary policy stances of the ECB and of central banks in the region.

In today’s meeting, based on the currently available data and assessments, the Board of the National Bank of Romania decided to keep the monetary policy rate at 2.50 percent per annum; 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. In addition, 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 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 11 February 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 14 February 2019, at 3:00 p.m. The next monetary policy meeting of the NBR Board is scheduled for 2 April 2019.


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