NBR BOARD DECISIONS ON MONETARY POLICY. THE MONETARY POLICY RATE TO 1.75 PERCENT PER ANNUM, FROM 1.50 PERCENT PER ANNUM

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By rbj
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.

verage 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.

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