NBR Board decisions on monetary policy. The monetary policy rate increases from 1.75% to 2.00% per annum

By rbj
The Board of the National Bank of Romania, having convened for the meeting of 10 January 2022, decided: >>> to increase the monetary policy rate to 2.00 percent per annum, from 1.75 percent per annum, as of 11 January 2022; >>>to extend the symmetric corridor of interest rates on standing facilities around the policy rate to ±1.00 percentage point from ±0.75 percentage points; thus, starting 11 January 2022, the lending (Lombard) facility rate will be raised to 3.00 percent per annum from 2.50 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 climbed to 7.94 percent in October 2021, from 6.29 percent in September, before falling to 7.80 percent in November under the impact of the capping and compensation of electricity and natural gas prices for households, thus mildly exceeding the forecast at the end of the first two months of Q4. Its increase continued to be mainly driven by exogenous CPI components, with major influences coming in this period especially from the hefty hike in the prices of fuels, i.e. the non-petrol-diesel subgroup, and to a smaller extent from higher VFE prices.
The annual adjusted CORE2 inflation rate further rose somewhat faster than anticipated, up from 3.6 percent in September to 4.0 percent in October and 4.3 percent in November. This reflected the effects of the surge in agri-food commodity prices and energy and transport costs, as well as the influences of persistent bottlenecks in production and supply chains, alongside those arising from measures to protect against COVID-19, all compounded by increasingly higher short-term inflation expectations.
The average annual CPI inflation rate and average annual inflation rate calculated based on the Harmonised Index of Consumer Prices went up to 4.5 percent and 3.7 percent respectively in November, from 3.6 percent and 2.9 percent respectively in September 2021.
Economic growth slowed down considerably in 2021 Q3, to 0.4 percent from 1.5 percent in Q2, contrary to expectations. This makes it likely for excess aggregate demand to shrink in this period to a much lower-than-forecasted value, also due to the recent notable downward revision of statistical data on the pace of economic advance in 2021 H1, which implies as well that in Q2 the pre-pandemic GDP level was surpassed by a relatively more modest margin.
Moreover, annual GDP dynamics saw in Q3 a visibly stronger-than-anticipated decline, i.e. to 7.4 percent from 13.9 percent in Q2, while remaining however high from a historical perspective, mainly on the back of private consumption, but also of the unusually large contribution made, in this period as well, by the change in inventories. On the other hand, the contribution of gross fixed capital formation unexpectedly turned marginally negative for the first time in the past 11 quarters, mainly on account of a sharper contraction in capital repair works, which outweighed the impact of the slight annual increases in new construction works and net investments in equipment (transport equipment included).
et exports further made a negative contribution to annual GDP dynamics, yet this narrowed notably versus the previous quarter, even amid a somewhat faster decline in the annual change in exports of goods and services than that in imports thereof. However, trade deficit deepened in annual terms at a much stronger pace in Q3, given the relatively more unfavorable developments in the prices of imported goods, while the current account deficit continued to see a slowdown in the annual growth rate, albeit much more modest than in Q2, due to improved annual rates of change of income balances.
Recent developments in high-frequency indicators point to a standstill in economic activity in 2021 Q4, also in the context of the fourth pandemic wave, the energy crisis and supply bottlenecks, entailing the fall in annual GDP dynamics to a significantly lower value than that anticipated in November 2021.