By Edwig Ban
The National Bank of Romania (BNR) has decided to raise the monetary policy rate to 2.25% per annum, from 2% per annum, starting on February 8, 2018, according to a press release of the Central Bank of Romania.
The institution also decided to increase the interest rate on the deposit facility to 1.25% per annum from 1% per annum and the lending facility at 3.25% per annum from 3% per year.
Another decision is to keep current levels of minimum reserve requirements applicable to the creditor and foreign currency liabilities of credit institutions. We present below the NBR Board decisions on monetary policy issues
'In December, the annual inflation rate climbed to 3.32 percent from 3.23 percent in November, falling within the range of the target, but higher than the forecast. Behind this evolution stood primarily the step-up in core inflation and, to a small extent, the volatility of food prices and tobacco product prices. The annual adjusted CORE2 inflation rate continued to go up, reaching 2.5 percent in December 2017 versus 2.3 percent in November. Against the background of the rising aggregate demand in the economy and growing producer costs (labor force, utilities), the increase affected all categories of goods and services, especially processed foods, which were also hit by some supply-side shocks that were common at a European level.
The average annual CPI inflation rate continued to rise to 1.3 percent in December 2017 from 1.0 percent in November; based on the Harmonized Index of Consumer Prices, the annual average stood at 1.1 percent, up from 0.9 percent in the previous month.
The revised data on third-quarter economic growth reconfirm the fast real GDP dynamics, 8.8 percent. The main driver of growth was household consumption (8.3 percentage points), whose annual rate of growth has risen considerably to 12.5 percent, similar to pre-crisis levels. The expansion in consumption was fostered by the income-boosting measures implemented since 1 July 2017, which overlapped with favorable financial conditions and stimulative labor market conditions. In 2017 Q3, gross fixed capital formation also made a positive contribution to economic growth (2.1 percentage points).
The contribution of net exports to GDP growth remained in negative territory. The current account deficit widened at a swifter annual rate, amid the larger negative balance on trade in goods. Statistical data for the first two months of the final quarter of 2017 point to a strengthening of the uptrend seen in industrial output, accompanied by a rapid advance in new orders across manufacturing and further high growth rates of activity in trade and services, backdrop of an increase in net real average wage. The trade deficit continued to worsen, as the annual growth rate of imports still outpaced that of exports.
Credit to the private sector continued its robust growth in December 2017, at an annual rate of 5.6 percent, given that the leu-denominated component increased by 15.8 percent in annual terms, its share in total credit widening to 62.8 percent (from 34.6 percent low in May 2012).
In today's meeting, the NBR Board examined and approved the February 2018 Inflation Report, which incorporates the most recent data and information available. The new scenario of projection points to prospects for a pick-up in the annual inflation rate in the months ahead, followed by a slowdown starting with the latter part of 2018. Thus, compared to the previous Inflation Report, the path of the projected the annual inflation rate has been revised upwards in the short run, mainly due to the relative strengthening of recent and anticipated inflationary effects of supply side factors as well as to the pressures from fundamentals.
The uncertainties and risks surrounding this outlook stem mainly from fiscal and income policy stances, labor market conditions, as well as from developments in administered prices.
Looking at the external environment, the volatility of international financial markets, developments in oil and agri-food prices, as well as the pace of economic growth in the euro area and worldwide, are also relevant in the context of normalization the monetary policy stances of the major central banks.
Given the current assessments, the information available at present, as well as the new sources of uncertainty, the Board of the National Bank of Romania decided to increase the monetary policy rate to 2.25 percent per annum from 2.00 percent per annum; moreover, the NBR Board decided to raise the deposit facility rate to 1.25 percent per annum and the lending (Lombard) facility rate to 3.25 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. The NBR Board underlines that the balanced macroeconomic policy mix and progress in structural reforms are of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand potential adverse developments.
The NBR is closely monitoring domestic and external developments and stands ready to use all its available tools with a view to fulfilling its primary objective.