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

NBR Board decisions on monetary policy (press release):

The annual inflation rate declined in November 2016 to -0.7 percent, slightly below the forecasted level, after having reached -0.43 percent in October. This was mainly due to the slower dynamics of tobacco product prices and to the impact of the price cuts for compulsory third-party liability insurance policies. The annual adjusted CORE2 inflation rate followed a relatively similar path, coming in at 0.47 percent in November 2016.

The average annual inflation rate remained stuck in November 2016 to the previous month’s reading, namely -1.6 percent, while that based on the Harmonised Index of Consumer Prices rose to -1.1 percent (from -1.2 percent in October 2016).

Economic growth lost momentum in 2016 Q3, witnessing a stronger-than-expected slowdown. Annual GDP dynamics decelerated to 4.4 percent (against 6 percent in Q2), solely due to the slacker advance in domestic demand, on account of both components, i.e. consumption and investment. The negative contribution of net exports shrank significantly, given the much sharper decline in the growth rate of imports compared with that of exports of goods and services. On the supply side, services became again the fastest-growing sector, further making the largest contribution to GDP dynamics.

During 2016 Q3, most economic sectors posted reductions in productivity gains in annual terms, whereas the annual dynamics of net average wage remained high, around the level recorded in the previous quarter.

Real monetary conditions remained stimulative. Credit to the private sector saw its growth pick up slightly in October-November, largely on account of loans to non-financial corporations. The share of leu-denominated credit in total private sector loans continued to widen, reaching 56.9 percent at end-November 2016, as the dynamics of the leu-denominated component were further high, while the negative change of foreign currency-denominated loans was marginally smaller. These developments certify the improvement in monetary policy transmission, while also helping mitigate the risks to financial stability.

The most recent assessments reconfirm the outlook for the annual inflation rate to re-enter positive territory in 2017 Q1 along with resuming an upward course, amid the fading out of the transitory effect of the standard VAT rate cut to 20 percent, excess demand and higher unit wage costs. However, the annual inflation rate is expected to stand lower than the level highlighted in the latest medium-term forecast.

The risks to the inflation outlook stem from both domestic and external sources. The external environment is marked by risks related to the euro area economic growth, the challenges to the European banking system, the Brexit negotiations, as well as those concerning the developments in the prices of oil and other commodities.

Based on currently available data and in the context of these uncertainties, the Board of the National Bank of Romania decided to keep unchanged the monetary policy rate at 1.75 percent per annum, to further pursue adequate liquidity management in the banking system, and 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. The consolidation of the economic picture calls for ensuring a balanced macroeconomic policy mix and progress in structural reforms.

The NBR is closely monitoring domestic and external developments and stands ready to use all its available tools during this period of heightened uncertainty.

According to the NBR Board decision, the account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the NBR website on 13 January 2017, at 3:00 p.m.

In line with the announced calendar, the next monetary policy meeting of the NBR Board is scheduled for 7 February 2017, when a new quarterly Inflation Report is to be examined.