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National Bank of Romania (NBR) Board decisions on monetary policy

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2023-04-04 16:35

NBR Board decisions on monetary policy

In its meeting of 4 April 2023, the Board of the National Bank of Romania decided:

• to keep the monetary policy rate at 7.00 percent per annum;

• to leave unchanged the lending (Lombard) facility rate at 8.00 percent per annum and the deposit facility rate at 6.00 percent per annum;

• to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The annual inflation rate went down to 15.52 percent in February 2023, from 16.37 percent in December 2022, relatively in line with forecasts. The decrease was mainly driven by the sizeable drop in the dynamics of fuel and electricity prices, under the impact of significant base effects and the change made to the energy price capping and compensation scheme starting 1 January 2023.

At the same time, the annual adjusted CORE2 inflation slowed its rise somewhat more visibly than anticipated, to reach 15.0 percent in February, from 14.6 percent in December 2022, amid disinflationary base effects and falling prices of some commodities, especially agri-food items, as well as the downward adjustment of short-term inflation expectations.

However, notable opposite influences continued to come from the gradual pass-through into consumer prices of increased costs of materials and wages, as well as from higher profit margins, in the context of the resilience of consumer demand, but also from the rise in the prices of some imported consumer goods.

The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 13.4 percent in February 2023 from 14.1 percent in December 2022. The average annual CPI inflation rate and the average HICP inflation rate continued however to go up, reaching 14.9 percent and 13.0 percent respectively in February 2023 from 13.8 percent and 12.0 percent respectively in December 2022, but remained below the levels prevailing in the region and the Baltic countries.

Economic growth slowed down only mildly in 2022 Q4, to 1.0 percent from 1.2 percent in the previous three months (quarterly change), thus exceeding expectations yet again, which makes it likely for excess aggregate demand to pick up again over this period, contrary to expectations.

In annual terms, economic growth stepped up to 4.6 percent in 2022 Q4, from 3.8 percent in the prior quarter, with the main contribution, for the second quarter in a row, from gross fixed capital formation, followed at a short distance by the contribution from household consumption.

The impact of net exports remained contractionary, but decreased significantly against Q3, as the particularly large deceleration in the annual dynamics of the import volume exceeded that in the annual dynamics of the export volume of goods and services. Against this background, the annual increase in the trade deficit slowed down markedly, while that in the current account deficit decelerated by two thirds to a two-year low, inter alia following the improvement in the evolution of the secondary income balance, on account of inflows of EU funds to the current account.

The latest data and analyses point to a more subdued slowdown in economic growth in 2023 Q1 than previously anticipated, implying however a pronounced deceleration versus the same year-earlier period, amid a base effect.

Thus, the annual growth rate of retail sales, including motor vehicle and motorcycle trade, continued to pick up in January 2023, while that of services to households posted a decline. At the same time, industrial output saw a wider contraction in annual terms, whereas the volume of construction works recorded a considerably slower increase compared to the same year-earlier period.

The annual changes in both exports and imports of goods and services saw large declines in the first month of 2023, with the former remaining however relatively higher, probably owing, inter alia, to the improved terms of trade. Consequently, trade deficit and current account deficit contracted significantly versus the same year-earlier period.

The growth in the number of employees in the economy continued to lose pace in December 2022-January 2023, while the ILO unemployment rate posted only a very slight decline in January-February 2023, after its advance to 5.7 percent in 2022 Q4. At the same time, in 2023 Q1 the labour shortage reported by companies saw a re-intensification of the downward trend visible since 2022 Q3, whereas employment intentions fluctuated significantly during the first three months of the current year, mainly owing to frequent changes in expectations in a sector.

The main interbank money market rates remained on a downward path in February-March, amid the excess liquidity in the banking system. However, the downward adjustment slowed and came to a halt towards the end of the period. At the same time, yields on government securities posted increases in February, which were fully corrected in March – in line with developments in advanced economies and in the region –, against the backdrop of successive revisions in investor expectations on major central banks’ prospective monetary policy stance, as well as of the turmoil created by the collapse of Silicon Valley Bank and Signature Bank in the US and by the situation of Credit Suisse.

The leu further exhibited a strengthening trend versus the euro during this period, reflecting the high relative attractiveness of investments in domestic currency. In the closing days of March, the EUR/RON rose gradually, returning to the vicinity of the values prevailing in 2022 H1.

The annual growth rate of credit to the private sector continued to decelerate in the first two months of 2023, albeit more moderately, reaching 10.6 percent in February from 12.1 percent in December 2022, amid the slower decline in the dynamics of the leu-denominated component, alongside the quasi-halt in the uptrend of the high dynamics of foreign currency loans. The share of leu-denominated loans in credit to the private sector continued, however, to fall, standing at 68.3 percent in February 2023 from 68.8 percent in December 2022.

According to current assessments, the annual inflation rate will probably fall at a faster pace over the following months, in line with the latest medium-term forecast (February 2023), under the influence of sizeable base effects and the downward corrections of some commodity prices, as well as amid the changes made to energy price capping and compensation schemes.

Uncertainties are, however, associated with the presumed impact of the new setup of energy price capping and compensation schemes, while the balance of supply-side risks is slightly tilted to the upside at the current juncture, given inter alia the vegetable shortage in Europe and the oil output cuts announced by OPEC countries.

At the same time, the war in Ukraine and the related sanctions continue to generate significant uncertainties and risks to the outlook for economic activity, hence to medium-term inflation developments, to which add those stemming from the turmoil in the banking systems in the US and Switzerland. All this could have adverse effects by affecting the economies of developed countries and the risk perception towards Central and Eastern Europe, with an impact on financing costs.

Furthermore, the absorption of EU funds, especially those under the Next Generation EU programme, is conditional on fulfilling strict milestones and targets for implementing the projects. However, it is essential for carrying out the necessary structural reforms, energy transition included, as well as for counterbalancing, at least in part, the contractionary impact of supply-side shocks, compounded by the war in Ukraine and by the tightening of economic and financial conditions worldwide.

Major uncertainties and risks are associated with the fiscal policy stance as well, given, on one hand, the public deficit target set for 2023 in order to continue budget consolidation amid the excessive deficit procedure and the significant increase in financing costs and, on the other hand, the packages of support measures implemented or extended this year, in a challenging economic and social environment domestically and globally, with potential adverse implications for budget parameters.

Particularly relevant are the Fed’s and the ECB’s monetary policy decisions, which render capital flows unclear, as well as the behaviour of central banks in the region.

In the meeting held today, 4 April 2023, based on the currently available data and assessments, as well as in light of the very elevated uncertainty, the NBR Board decided to keep the monetary policy rate at 7.00 percent per annum.

Moreover, it decided to leave unchanged the lending (Lombard) facility rate at 8.00 percent per annum and the deposit facility rate at 6.00 percent per annum. Furthermore, the NBR Board decided to keep 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 bring the annual inflation rate back in line with the 2.5 percent ±1 percentage point flat target on a lasting basis, inter alia by anchoring inflation expectations over the medium term, in a manner conducive to achieving sustainable economic growth. At the current juncture, the balanced macroeconomic policy mix and the implementation of structural reforms, also by using EU funds 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 adverse developments.

The NBR closely monitors developments in the domestic and international environment and will continue 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 NBR’s website on 18 April 2023 at 3:00 p.m.
In line with the announced calendar, the next monetary policy meeting of the NBR Board will be held on 10 May 2023.

Taguri: Banca Nationala a Romaniei (BNR)  National Bank of Romania (NBR)  


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