The National Bank of Romania (NBR) raised its monetary policy rate by another 25 basis points to 1.75 percent and has now raised it 50 points following a similar rate hike in October, the bank's first rate hike since May 2018.
But the net increase in the policy rate this year is only 25 basis points as the central bank cut the rate by the same amount in January.
NBR's board also widened its interest rate corridor to plus/minus 75 basis points from 50 points, with the result the Lombard lending rate will rise to 2.50 percent from 2.0 percent while the deposit rate will remain at 1.0 percent.
"The Board of the National Bank of Romania, having convened for the meeting of 9 November 2021, decided:
- to increase the monetary policy rate to 1.75 percent per annum, from 1.50 percent per annum, as of 10 November 2021;
- to extend the symmetric corridor of interest rates on standing facilities around the policy rate to ±0.75 percentage points from ±0.50 percentage points; thus, starting 10 November 2021, the lending (Lombard) facility rate will be raised to 2.50 percent per annum from 2 percent per annum, while the deposit facility rate will be kept at 1.00 percent per annum;
- to maintain firm control over money market liquidity;
- 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 continued to rise above the upper bound of the variation band of the target in September 2021, climbing to 6.29 percent, i.e. significantly above the forecast, from 5.25 percent in August and 3.94 percent in June 2021. Its faster increase during Q3 was triggered especially by exogenous CPI components, much the same as in the first part of the year. This time round, the main contributor was the significant hike in natural gas and electricity prices in July, alongside influences from the further rise in fuel prices and the notable pick-up in vegetable prices in September.
The annual adjusted CORE2 inflation rate followed a higher upward path in Q3 to reach 3.6 percent in September from 2.9 percent in June. The evolution illustrates the effects of the rising prices of agri-food items and higher energy and transport costs, as well as the influences stemming from the persistent bottlenecks in production and supply chains, fuelled domestically by the stronger demand for goods and services after the easing of mobility restrictions and the upward movement of short-term inflation expectations, coupled with the impact of costlier compulsory motor third-party liability insurance policies in September.
Average annual CPI inflation rate and average annual inflation rate calculated based on the Harmonised Index of Consumer Prices climbed to 3.6 percent and 2.9 percent, respectively, in September, from 2.9 percent and 2.4 percent, respectively, in June 2021.
The new statistical data indicate that the economy grew by 1.9 percent in 2021 Q2 – a relatively slower quarterly pace versus Q1, but somewhat brisker than previously anticipated –, showing also a stronger increase in its annual dynamics to 13.9 percent, from -0.2 percent in Q1, amid the base effect associated with the sharp economic contraction in the same year-earlier period. This implies that GDP exceeded more obviously its pre-pandemic level during this period, as well as that excess aggregate demand stood slightly higher than expected.
All major aggregate demand components contributed to the pick-up in annual GDP dynamics, albeit to considerably different and slightly modified extents compared to previous estimates. Thus, private consumption made almost the prevailing contribution, followed closely by the change in inventories, whereas gross fixed capital formation and general government consumption had modest contributions. Furthermore, the negative contribution of net exports to annual GDP dynamics decreased in Q2, albeit to a somewhat lower extent than previously anticipated, given that the particularly sharp increase in the annual change in exports of goods and services outpaced that in imports thereof. The trade deficit recorded, however, a faster widening in annual terms, while the annual dynamics of the current account deficit slowed down considerably versus Q1, under the impact of a relative improvement in income balances, remaining nevertheless above the average values recorded in 2019 and 2020.
The latest developments and analyses indicate a more pronounced slowing of GDP growth, excluding agriculture, in the second half of 2021 compared to prior forecasts, which makes it likely for excess aggregate demand to narrow during this period, contrary to the slight increase anticipated in August. The economy as a whole is expected however to see a renewed acceleration in growth in Q3, due to the very good performance of agriculture, while its annual dynamics are anticipated to see a relatively more moderate deceleration, remaining particularly high from a historical perspective.
It is worth mentioning that the annual dynamics of retail trade, the motor vehicles and motorcycles segment and market services to households stayed at an elevated level in July-August, yet considerably lower than in Q2. The annual growth rate of industrial output and that of new orders in manufacturing declined, however, considerably from the very high values recorded in Q2, while the construction activity contracted in annual terms. At the same time, turning to exports of goods and services, their annual change declined significantly in July-August, much more swiftly than that of imports, which triggered a fast acceleration in the annual increase in trade deficit. The current account deficit witnessed, however, a considerable deceleration in its annual growth rate during this period owing to income balances, but, in the first eight months of 2021 as a whole, it continued to exceed by more than 55 percent the level seen in the same period of the previous year.
Labour market developments remained relatively favourable in the first two months of Q3, yet amid rising supply issues and higher energy prices, as well as increased uncertainties about the epidemiological situation. All these affected hiring in different economic sectors, as well as the ILO unemployment rate, which saw a halt in its downward trend during this period, increasing slightly against June, while returning to 5.0 percent in September.
Looking at the financial market, key interbank money market rates saw a faster pick-up in October, hitting 17-month highs, prompted by the policy rate hike, as well as amid the tightening of liquidity conditions and the expectations on a further increase in the reference rate. In turn, yields on government securities followed a considerably steeper upward path across the entire maturity spectrum, inter alia in the context of the persistence of domestic political tensions and the uptrend in long-term government bond yields in developed economies and regionally. Against this background, the EUR/RON exchange rate quasi-stabilised at the high readings reached in mid-September, reflecting also the influences from the abatement of volatility on the international financial market.
The annual growth rate of credit to the private sector climbed further in the two-digit range in September, reaching 13.4 percent from 12.8 percent in August, due to the intense lending in local currency, supported, inter alia, by government programmes. Hence, in September, the leu-denominated component saw its pace of increase accelerate to 18.4 percent – the highest reading since May 2016 – from 17.5 percent in August, its share in total private sector credit widening to 71.6 percent.
In today’s meeting, the NBR Board examined and approved the November 2021 Inflation Report, which incorporates the latest available data and information.
The updated forecast shows a significant additional worsening of the inflation outlook almost throughout the projection horizon, under the strong impact of supply-side shocks, as the forecasted path of the annual inflation dynamics has been again revised considerably upwards, especially over the short term.
Specifically, the annual inflation rate is expected to remain on a steep uptrend until towards mid-2022, hence to climb further above the variation band of the target and above the previously forecasted levels, mainly as a result of the sizeable hikes anticipated for energy prices in 2021 Q4 and 2022 Q1, amid the abrupt rise in international prices. Afterwards, it will witness, however, a relatively swift downward adjustment, returning in 2023 Q3 inside the variation band of the target, in the context of ample base effects, as well as of the probably much slower increase in the excess aggregate demand, on a markedly lower trajectory than that projected in August.
The measures designed to compensate and cap price increases for electricity and natural gas for households, presumed to be applied temporarily during this winter, entail fluctuations in the forecasted path of the annual inflation rate over the short time horizon – pick-up in October 2021, followed by a decline in November and then by another rise in April 2022, once prices return to the levels stipulated in the contracts. The way in which their impact will be included in the CPI calculation is still uncertain. Moreover, uncertainties and risks continue to stem from developments in commodity prices, particularly of energy and agri-food, as well as from bottlenecks in production and supply chains, likely to accelerate global inflation.
Major sources of uncertainties and risks are further associated with the fiscal policy stance and the absorption of European funds, especially those under the Next Generation EU programme, also in the context of the political crisis, given inter alia: i) the unknowns about this year’s second budget revision and the coordinates of the 2022 draft budget that would certify the prospective step-up in fiscal consolidation, in line with the commitments under the excessive deficit procedure; ii) the legal and technical procedures due for completion for the disbursement of a pre-financing under the National Recovery and Resilience Plan, alongside the milestones and targets to be reached for further disbursements.
The fourth pandemic wave and the related containment measures also continue to generate high uncertainties and risks to the forecasts, at least in the near run, amid the serious public health crisis on the domestic front and the potential implications for economic activity and labour market, but also owing to the spread of the fourth wave in other European countries, badly hit by the energy crisis and by the persistence of bottlenecks in production and supply chains as well.
In the meeting held today, 9 November 2021, based on the assessments and data currently available, and in light of the elevated uncertainty, the NBR Board decided to increase the monetary policy rate to 1.75 percent per annum, from 1.50 percent per annum, as of 10 November 2021 and to maintain firm control over money market liquidity. Moreover, the NBR Board decided to extend the symmetric corridor of interest rates on standing facilities around the policy rate to ±0.75 percentage points from ±0.50 percentage points, implying that the lending (Lombard) facility rate will be raised to 2.50 percent per annum from 2 percent per annum, while the deposit facility rate will be kept at 1.00 percent per annum. These decisions are circumscribed to the process of gradual normalisation of the monetary policy conduct that the NBR is carrying out, amid high uncertainties, the same as other central banks in the region. At the same time, 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 bring back and maintain the annual inflation rate in line with the 2.5 percent ±1 percentage point flat inflation target, inter alia via the anchoring of inflation expectations over the longer time horizon, in a manner conducive to achieving sustainable economic growth in the context of the fiscal consolidation process, while safeguarding financial stability.
The NBR closely monitors developments in the domestic and international environment and stands ready to use the tools at its disposal to achieve the fundamental objective of price stability in the medium term.
The new quarterly Inflation Report will be released on 11 November 2021 at 10:00 a.m. 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 19 November 2021 at 3:00 p.m.
In line with the announced calendar, the next monetary policy meeting of the NBR Board is scheduled for 10 January 2022."
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