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Board of the National Bank of Romania (BNR) decided to keep unchanged the monetary policy rate at 2.50%
06 August 2018, 9:25 PM

By Andra Beltz
The annual CPI inflation rate stopped increasing in June, when it stalled at 5.4 percent, above the variation band of the inflation target. The stagnation occurred as the impact of the faster annual rise in fuel prices and fruit and vegetables prices was offset by that of the slower growth of tobacco product prices and the slight deceleration in core inflation.
The annual adjusted CORE2 inflation rate (which excludes from the CPI inflation a number of prices on which monetary policy has limited or no influence, i.e. administered prices, volatile prices, and tobacco product and alcoholic beverage prices) continued to fall somewhat, down to 2.9 percent in June from 2.99 percent in the prior month and 3.05 percent in March. The slowdown was ascribed to processed food and services components, largely under the influence of the dynamics of international prices of some agri-food items and the movements in the EUR/RON exchange rate. In June, the average annual CPI inflation rate reached 3.6 percent, against 3.3 percent in May; calculated based on the Harmonised Index of Consumer Prices, the average annual rate came in at 2.9 percent from 2.6 percent in May.
Provisional data on first-quarter economic growth point to its moderation to 4 percent from 6.7 percent in the final quarter of 2017. This development is a return towards the potential rate of increase, being accompanied by a contraction in excess aggregate demand. The major contribution, albeit on the wane against 2017 Q4, of household consumption was revised slightly downwards, while the positive contribution of gross fixed capital formation was revised upwards. The negative contribution of net exports to the advance in real GDP widened considerably, given that the new figures show the yearly dynamics of imports decelerating more slowly than previously announced, further running at quite elevated levels. The latest statistical data show a deceleration in the annual growth of industrial output in April-May compared with 2018 Q1, together with a significant increase, however, in the growth rate of new orders across manufacturing. Construction works kept declining in annual terms, owing to residential construction, whereas activity in trade further grew at a robust pace. The current account deficit widened year on year at a substantially slower rate. At the same time, the annual change of unit wage costs in the industrial sector climbed to 8.6 percent in May, up 2.4 percentage points versus April, amid slower growth in labour productivity.
Monetary conditions have further been less accommodative, amid the increase in relevant money market rates and the slight appreciation trend of the leu versus the euro.
The annual growth rate of credit to the private sector regained momentum in June, to 6.8 percent from 6.4 percent in May, driven by loans to households, but especially by credit to non-financial corporations. The leu-denominated component further widened its share in total private sector credit, to reach 65 percent (from a 35.6 percent low in May 2012).
In today’s meeting, the NBR Board examined and approved the August 2018 Inflation Report, which incorporates the most recent data and information available. The new scenario of the projection reconfirms the prospects for a decline in Q3 in the annual inflation rate, which is seen remaining above the variation band of the target, before dropping more visibly in the final months of 2018 towards the upper bound of the 1.5 percent-3.5 percent target band. The anticipated path of the annual inflation rate sticks to coordinates quasi-similar to those in the preceding projection over the short term, but has been slightly revised downwards over the longer time horizon.
The uncertainties and risks surrounding the inflation outlook stem mainly from developments in administered prices (natural gas and electricity), volatile food prices and prices of some processed food items, as well as from labour market conditions and the fiscal policy stance. Also relevant are the future movements in the international oil price, the economic growth pace and the inflation dynamics in the euro area and the EU and hence the monetary policy stance of the ECB and of central banks in the region.
Based on the currently available data, the Board of the National Bank of Romania decided to keep unchanged 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.
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