In today’s meeting, based on the currently available data and assessments, the NBR Board decided to keep unchanged the monetary policy rate at 2.50 percent per annum, while maintaining strict control over money market liquidity. 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.

Furthermore, the central bank maintained the current levels of the minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The NBR Board’s 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.

Economic preview

The annual CPI inflation rate went up to 4.1 percent in July from 3.8 percent in June, whereas in August it declined to 3.9 percent, in line with the forecast, remaining above the variation band of the target.

The evolution owed mainly to the hike in tobacco product prices and, to a lower extent, to the upward path followed by fuel prices and core inflation, the impact of which was only partly counterbalanced by that of a slowdown in the annual growth rate of administered prices and volatile food prices.

The annual adjusted CORE2 inflation rate (which excludes from the CPI inflation administered prices, volatile prices, and tobacco product and alcoholic beverage prices) continued to increase, at a relatively slower pace than anticipated, to reach 3.4 percent in August from 3.3 percent in June.

The advance reflected the opposite influences stemming from the rise in some international agri-food prices and from the cut in the prices of some telephony services, overlapping significant demand-pull and wage cost-push inflationary pressures, as well as the elevated short-term inflation expectations.

Average annual CPI inflation rate continued to decline from 4.1 percent in June to 4.0 percent in July and 3.9 percent in August; calculated based on the Harmonised Index of Consumer Prices, the average annual inflation rate remained at 4.0 percent (the level recorded in June) July through August.

Statistical data on economic growth in 2019 Q2 indicate a mild deceleration in real GDP to 4.4 percent from 5 percent in the previous quarter (annual changes).

On the demand side, the contribution made by household consumption continued to be significant, albeit on a decrease, being marginally exceeded by that of gross fixed capital formation, whose annual dynamics surged (to 18 percent from 3.9 percent in Q1).

Net exports had a smaller negative contribution to GDP dynamics amid a more pronounced slowdown in the annual growth rate of imports than in that of exports of goods and services, also visible in the relative slowing of the annual pace of increase of the negative balance on trade.

However, the current account deficit saw a faster deepening against the same period of the previous year, as a result of the worsening of the primary and secondary income balances.

The latest statistical data point to a further fast pace of increase of the activity in retail trade and services in July, a further strong uptrend in the dynamics of construction works, as well as a faster drop in industrial production, including manufacturing.

The growth rate of credit to the private sector picked up slightly in the first two months of Q3, to 7.9 percent in July, from 7.1 percent in June, and then to 8 percent in August.

Behind the advance stood both leu-denominated loans and the foreign currency component. The latter continued to record faster dynamics ascribable solely to corporate credit.

Against this background, the share of domestic currency loans in total private sector credit increased only marginally, to 66.7 percent in August.

The latest assessments indicate the outlook for the annual inflation rate to remain above the variation band of the target until the end of this year, on a trajectory slightly below that shown in the latest medium-term forecast published in the August 2019 Inflation Report.

Domestically, the future fiscal and income policy stance represents a source of heightened uncertainties and risks to the inflation outlook, also amid the 2019-2020 election calendar, while the widening of the current account deficit is increasingly becoming a matter of concern.

On the external front, rising uncertainties stem from the increasingly obvious weakening of the euro area and global economies, as well as from the growing risks to their outlook, in the context of the trade war and Brexit. Particularly relevant are the ECB’s and the Federal Reserve’s decisions on monetary policy easing, as well as the stance of central banks in the region.

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