National Bank of Romania published today, July 19, the minutes of the board meeting from July 7. NBR decided to keep the monetary policy rate at 1.25 percent and also to leave unchanged the deposit facility rate at 0.75 percent and the lending (Lombard) facility rate at 1.75 percent.
Here are the main points of the meeting:
Looking at the recent developments in consumer prices, Board members showed that the annual inflation rate had risen to 3.24 percent in April 2021 from 3.05 percent in March and to 3.75 percent in May, thus exceeding the variation band of the target somewhat earlier than expected. It was observed that behind the upward path had stood almost entirely the exogenous CPI components, particularly the hike in fuel prices amid higher oil prices, and that modest additional influences had stemmed from higher tobacco prices and the relatively more pronounced increase in VFE prices.
At the same time, it was noted that the annual adjusted CORE2 inflation rate had risen to 2.9 percent in April 2021 from 2.8 percent in March, while remaining flat in May – contrary to the forecast indicating a further slow decline. That had occurred as the disinflationary base effects visible in the processed food sub-component had been more than offset by the opposite influences from the services segment and to a very low extent from the developments in the prices of some food and non-food items. Board members agreed that the latter influences could be overall attributable to a slight step-up in the annual depreciation of the leu against the euro, as well as to the temporary effects of the increase in consumer demand once with the easing of some mobility restrictions, overlapping those resulting from disruptions on the supply side and costs associated with more expensive raw materials and measures to prevent the spread of the coronavirus infection.
Looking at the labour market, Board members observed an improvement in its parameters starting with March 2021, including vis-à-vis expectations, amid the ongoing recovery in several economic sectors and the progress in vaccination, as well as due to government’s job retention scheme. Thus, the number of employees economy-wide had resumed the upward trend and its annual dynamics had returned to positive territory in April, also on account of a base effect, while the ILO unemployment rate had re-entered a downtrend, falling to 5.5 percent in May from 5.9 percent in January-February 2021. At the same time, the available data and information suggested an advance in the job vacancy rate in Q2 – given the phased lifting of several mobility restrictions –, and even difficulties in recruiting skilled labour in highly specialised industries, the total number of employees remaining however below the pre-pandemic level.
Looking at future developments, Board members showed that, according to the latest information and analyses, the annual inflation rate would probably witness a steeper-than-anticipated rise over the short time horizon compared to the medium-term forecast published in the May 2021 Inflation Report, which had indicated a 4.1 percent peak in September-December 2021 and values of around 3 percent during 2022.
In the Board members’ unanimous opinion, the analysed context warranted leaving unchanged the monetary policy rate and the interest rates on the NBR’s standing facilities. Such a calibration of the monetary policy conduct aimed to preserve price stability over the medium term in line with the 2.5 percent ±1 percentage point flat inflation target, in a manner conducive to achieving sustainable economic growth in the context of fiscal consolidation, while safeguarding financial stability. Moreover, it was deemed necessary to closely monitor domestic and global developments so as to enable the NBR to tailor its available instruments in order to achieve the overriding objective regarding medium-term price stability.
Under the circumstances, the NBR Board unanimously decided to keep the monetary policy rate at 1.25 percent; moreover, it decided to leave unchanged the deposit facility rate at 0.75 percent and the lending (Lombard) facility rate at 1.75 percent. Furthermore, the NBR Board unanimously decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.