In its meeting of 12 November 2020, the Board of the National Bank of Romania decided the following:>>> to keep the monetary policy rate at 1.50 percent per annum; >>> to leave unchanged the deposit facility rate at 1.00 percent per annum and the lending (Lombard) facility rate at 2.00 percent per annum; >>> to cut the minimum reserve requirement ratio on foreign exchange-denominated liabilities of credit institutions to 5 percent from 6 percent starting with the 24 November – 23 December 2020 maintenance period and keep the minimum reserve requirement ratio on leu-denominated liabilities of credit institutions at 8 percent.
On the domestic front, the incoming data and information since the NBR Board meeting held in August show a larger-than-expected upturn in the economy over the summer, supported by government programmes and the NBR’s monetary policy measures. However, the recovery will probably come to a halt towards the end of the year or even see a slight reversal amid the resurgence of the pandemic and the mobility restrictions.
The annual CPI inflation rate decelerated to 2.45 percent in September (2.68 percent in August) and to 2.24 percent in October.
In line with expectations, the economy witnessed a severe contraction in 2020 Q2, by 10.3 percent in annual terms and by 11.9 percent in quarterly terms, under the impact of the pandemic and the restrictive measures imposed during the state of emergency. The main driver of the decline was the plunge in household consumption, whereas gross fixed capital formation continued to rise mildly amid the hike in equipment purchases and the resilience of the construction activity. The annual dynamics of general government consumption remained in the two-digit range, albeit on a slight decrease versus the previous quarter.
Furthermore, the massive fall in exports of goods and services outpaced visibly the drop in imports thereof, causing the annual dynamics of the negative trade balance to step up again. The current account deficit continued, however, to narrow in annual terms due to the improved dynamics of the primary and secondary income balances, on account of the returns on equity holdings and inflows of EU funds.
The NBR Board examined and approved the November 2020 Inflation Report, which incorporates the latest available data and horizon, the same as in previous forecasts. At the same time, the outlook for adjusted CORE2 inflation is fully reconfirmed, as its annual rate is seen decelerating only slightly at end-2020, but much more visibly afterwards, declining in the latter part of next year and thereafter remaining slightly below the mid-point of the target, amid the disinflationary effects from the aggregate demand deficit.
The uncertainties surrounding the new macroeconomic projections continue to be extremely elevated in the current environment, triggering two-way risks to the inflation outlook over the projection horizon. Their major source remains, at least in the short run, the coronavirus pandemic and the related containment measures – in the context of the new wave that gains increasing momentum –, as well as their impact on the domestic and European/global economies.
The NBR Board decided to keep the monetary policy rate at 1.50 percent per annum; moreover, it decided to leave unchanged the deposit facility rate at 1.00 percent per annum and the lending (Lombard) facility rate at 2.00 percent per annum. Given the developments in foreign currency lending and the adequate level of forex reserves, the NBR Board decided to cut the minimum reserve requirement ratio on foreign currency-denominated liabilities of credit institutions to 5 percent from 6 percent starting with the 24 November – 23 December 2020 maintenance period. The measure also aims to continue the harmonisation of the minimum reserve requirements mechanism with the relevant standards and practices of the European Central Bank and the major central banks across the European Union. The minimum reserve requirement ratio on leu-denominated liabilities remains unchanged at 8 percent.
The NBR Board considers that such a calibration of the monetary policy conduct is likely to provide an underpinning to the recovery of economic activity over the projection horizon with a view to bringing and strengthening over the medium term the annual inflation rate in line with the 2.5 percent ±1 percentage point inflation target, while safeguarding financial stability.