National Bank of Romania decisions on monetary policy issues

NBR Board decisions on monetary policy issues (press release):

In line with expectations, the annual inflation rate added 0.6 percentage points against the previous month to -0.2 percent in August 2016. The annual inflation rate remaining in negative territory was attributed to the developments in administered prices, while volatile and tobacco prices posted positive dynamics year on year.

Adjusted CORE2 inflation1 followed a slightly upward path, coming in at 0.5 percent in August.

Turning to the 12-month averages, inflation rate advanced to -1.8 percent in August 2016 and that based on the Harmonised Index of Consumer Prices rose to -1.4 percent.

Economic growth exceeded expectations in 2016 Q2 (6 percent), as a result of the expansion in household consumption and investment, with an impact on the current account deficit. Net exports thus increased their negative contribution to annual GDP growth. On the supply side, the services sector had further a prevailing contribution to the pick-up in economic activity.

In 2016 Q2 as a whole, the annual rate of increase of unit wage costs in industry remained as elevated as in the previous quarter, given that the step-up in wage growth was countered by the improvement in labour productivity dynamics.

Real monetary conditions remained stimulative, underpinning the favourable developments in credit to the private sector, including in terms of the currency breakdown. The annual growth rate of leu-denominated loans stood at 14.5 percent in real terms in August, while the annual dynamics of foreign currency-denominated loans remained strongly negative at -12.9 percent.

Against this background, the share of leu-denominated loans in total loans to the private sector climbed to 55.9 percent versus a 34.6 percent low in May 2012. These developments confirm the improved monetary policy transmission, while also helping mitigate the risks to financial stability.

Recent assessments reconfirm the outlook for the annual inflation rate to remain in negative territory until end-2016. Thereafter, the annual inflation rate is expected to pick up gradually and return inside the variation band of the flat target in 2017 H2, amid the fading-out of the effects exerted by the standard VAT rate cuts and by global disinflationary shocks, along with inflationary pressures from aggregate demand and unit wage costs.

Risks to the inflation outlook stem from elevated uncertainties surrounding both the domestic and external environments.

Based on currently available data and in the context of heightened uncertainty, the Board of the National Bank of Romania has decided to keep unchanged the monetary policy rate at 1.75 percent per annum and to further pursue adequate liquidity management in the banking system.

Given the contraction in foreign currency lending, the consolidation of the adequate level of forex reserves (EUR 33.1 billion at end-August 2016) and their improved composition, the NBR Board has decided to cut the minimum reserve requirements ratio on foreign exchange-denominated liabilities of credit institutions to 10 percent from 12 percent starting with the 24 October – 23 November 2016 maintenance period.

The measure aims to continue the harmonisation of the minimum reserve requirements mechanism with the relevant standards and practices of the European Central Bank and the major central banks across the European Union. The minimum reserve requirements ratio on leu-denominated liabilities remains unchanged at 8 percent.

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 a balanced macroeconomic policy mix and progress in structural reforms.

The NBR is closely monitoring external and domestic 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 7 October 2016, at 3:00 p.m.

In line with the announced calendar, the next NBR Board meeting dedicated to monetary policy issues is scheduled for 4 November 2016, when a new quarterly Inflation Report is to be examined.