Romania: Central Bank holds rates unchanged at July meeting
At its monetary policy meeting on 4 July, the National Bank of Romania (NBR) decided to keep the policy rate unchanged at 2.50%. Moreover, the Bank decided to leave the deposit facility rate unchanged at 1.50% and the lending facility (Lombard) rate at 3.50%. The NBR left the reserve requirement on both leu- and foreign-currency denominated liabilities unchanged.
Manageable core inflation and a sharper-than anticipated slowdown in growth underpinned the Bank’s decision. Headline inflation increased to 5.4% in May (April: 5.2%), moving further above the upper band of the Bank’s target range of 1.5%–3.5%, where it has been for five consecutive months. Inflation was fueled by supply-side factors, as well as by recent increases in fuel prices. Core inflation, however, eased somewhat, influenced by some appreciation in the local currency and softer growth in prices for processed food and services. Moreover, monetary conditions continued to tighten in May and June.
Economic activity slowed sharply in the first quarter, with GDP expanding 4.0% year-on-year (Q4: +6.7% year-on-year). Soaring inflation and rising interest rates dragged heavily on private consumption in Q1, while fixed investment growth was restrained by ongoing difficulties in the absorption of EU structural funds and some weakness in the construction sector. Heading into the second quarter, lackluster, but accelerating, industrial output growth in April, and low unemployment and a faster expansion in consumer credit in April and May, suggest economic activity could have regained some steam in Q2. That said, a widening budget deficit, together with a sizeable current account shortfall and elevated inflation, points to continued economic overheating.
The NBR expects inflation to stay above its target range in the coming months then decline to near the upper band of the range by year-end. The Bank referred to a list of the most significant risks surrounding the medium-term outlook, including future wage dynamics and oil prices, the development in administered prices, international financial market volatility and escalating trade protectionism. In its communiqué it stated it will secure price stability as conducive to sustainable economic growth. Once again, the Bank called for structural reforms to strengthen the country’s productive capacity.
The next monetary policy meeting is scheduled for 6 August 2018.