The board of the National Bank of Romania (NBR) approved the latest inflation report, which will be presented on Feb. 9, in which the baseline forecast remains for inflation to revert to positive territory in the first quarter of this year as the impact of the cut in Value-Added-Tax fades.
In its previous inflation forecast from November the NBR forecast 2017 inflation of 2.1 percent but since November there have been price cuts in automotive liability insurance, non-tax fees and charges have been scrapped and special excise duties on fuel were removed from Jan. 1.
The central bank said inflation is still on an upward path and should re-enter the target range by the end of this year and climb into the upper half at the start of 2018 to reach higher-than-previously forecast levels.
The NBR targets inflation at a midpoint of 2.5 percent within a range of 1.5 to 3.5 percent.
Romania's inflation rate turned negative in June last year due to the cut in VAT and hit a low of minus 3.5 percent in May but has risen since then and was minus 0.54 percent in December.
The National Bank of Romania issued the following statement:
"In its meeting of 7 February 2017, the Board of the National Bank of Romania (NBR) decided the following:
- to keep unchanged the monetary policy rate at 1.75 percent per annum;
- to pursue adequate liquidity management in the banking system; and
- to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
In December 2016, the annual CPI inflation rate rose to -0.54 percent from -0.67 percent in the previous month, below the forecasted level. This evolution was entirely ascribable to the return to positive territory of the annual dynamics of fuel prices, the impact of which was mitigated by that of the decline in the annual adjusted CORE2 inflation rate1. In Q4 as a whole, the annual inflation rate saw a marginal increase (-0.57 percent in September), slightly below expectations. At end-2016, the annual adjusted CORE2 inflation rate stood at 0.3 percent, compared to 0.6 percent in September.
The average annual inflation rate continued to post less negative values, standing at -1.5 percent in December 2016 (from -1.7 percent in September) on the back of the diminishing statistical impact of applying the reduced VAT rate to all food items; similarly, the inflation rate based on the Harmonised Index of Consumer Prices rose to -1.1 percent in December 2016 from -1.3 percent in September 2016.
The stronger-than-expected deceleration in annual economic growth in 2016 Q3 was ascribable to the slacker advance in domestic demand on account of the slowdown in household consumption and gross fixed capital formation. In the context of a much sharper decline in the growth rate of imports compared to that of exports of goods and services, the negative contribution of net exports to real GDP growth shrank to almost zero. The latest statistical data reveal a further robust annual growth rate of the turnover volume of retail trade in the first months of 2016 Q4 and a faster annual rate of increase of industrial output, with construction posting, however, a steeper decline. Furthermore, the annual dynamics of unit wage costs in industry remained high.
Real monetary conditions continued to be stimulative in January 2017. Average remuneration of new time deposits remained relatively steady in December 2016, while the average interest rate on new loans to the private sector fell to a new historical low. Credit to the private sector kept rising at a faster pace in December 2016, further on the back of non-financial corporations.
The share of leu-denominated credit in total private sector loans continued to widen, reaching 57.2 percent. This certifies a better monetary policy transmission, while also helping mitigate the risks to financial stability.
In today’s meeting, the NBR Board examined and approved the February 2017 Inflation Report, which incorporates the most recent data and information available. The baseline scenario of the projection reconfirms the outlook for the annual inflation rate to revert to positive territory in 2017 Q1, amid the fading out of the impact of the standard VAT rate cut to 20 percent. The annual inflation rate is, however, projected to run at lower levels and its subsequent rise is relatively slower, due mainly to new disinflationary supply-side shocks that emerged from November 2016 to February 2017. They include the price cuts for compulsory motor third-party liability insurance policies and the scrapping of non-tax fees and charges, whose effects add to those coming from the standard VAT rate cut to 19 percent and the removal of the special excise duty on fuels as from 1 January 2017.
The projected annual inflation rate retains its upward path. Specifically, it is seen re-entering the variation band of the flat target towards the end of 2017 and climbing into the upper half of this band at the beginning of 2018 to reach higher-than-previously-forecasted levels.
The risks and uncertainties surrounding the inflation outlook stem from both domestic and external environment. Domestically, they originate mainly in the fiscal and income policy stance during 2017. In addition, uncertainties linger as to future adjustments in administered prices, but also to the developments in the general domestic environment.
On the external front, still relevant are the risks related to euro area economic growth arising from political uncertainties associated with the elections scheduled for this year and Brexit talks, the divergence between monetary policy stances of the world’s major central banks, and the issues facing the European banking system.
In this context and based on currently available data, the Board of the National Bank of Romania decided to keep unchanged the monetary policy rate at 1.75 percent per annum, to further pursue adequate liquidity management in the banking system, and 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 reiterates that a 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 potentially adverse global developments.
The NBR is closely monitoring domestic and external developments and stands ready to use all its available tools with a view to achieving its objectives.
The new quarterly Inflation Report will be released to the public in a press conference on 9 February 2017. 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 14 February 2017, 3:00 p.m.
The next monetary policy meeting of the NBR Board is scheduled for 5 April 2017."
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