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BNR minutes: Soft terms that Governor used for assessing serious problems. List of critical situations

de Adrian N Ionescu , 27.5.2019

The volatility of the new benchmark indicator for loans granted to the population, IRCC – which declined in May, despite the central bank’s control on liquidity – was one of the topics debated by the Board of Directors of the National Bank of Romania (BNR) in its meeting held on May 15th.

The impact of the new indicator on the monetary policy transmission mechanism has also been analysed, as well as recent inflation’s evolution, which, in the context of increased consumption, exceeded forecasts.

Among the concerns expressed by the BNR’s management there were:

  • the evolution of the current account deficit,
  • the improbability of an increase in investment
  • tensions in the labour market.

In this context, although the board has decided to maintain interest rates, they estimated that, given the macroeconomic conditions and internal and external risks, a stronger control on the money market liquidity is essential.

Sweetness in formulations for alerting on critical situations:

1- Economic growth “in the context of new data; its main determining factor is the stock variation, followed by households’ consumption

2- “Gross fixed capital formation (that is investments – editor’s note) and net exports act toward the erosion of the economic growth

3- “negative contribution of net exports may increase,

given the strong acceleration in the annual growth of the trade deficit in first three months of the year, in the context of a stronger decline in the dynamics of exports of goods and services”

4 – “Continued deepening, in this context, of the current account deficit compared to the same period of the last year was considered worrisome by some members of the board” (in fact, the current account deficit went long time ago beyond the alarm threshold – editor’s note)

5- “A clear recovery of investment is considered unlikely given the constraints created by the structure of the budget program, as well as the frequent legislative measures and amendments implemented in recent years that are likely to affect companies’ profits and confidence but also the rhythm of direct foreign investment”

The big problem of inflation and labour crisis

  • It has been noted that during the first months of the year the annual inflation rate went consistently against the forecasts and all major CPI components had monthly increases above expectations. Evolution in the vegetable and fruit segment, tobacco and fuel products, as well as the dynamics of the basic inflation component were decisive in reaccelerating inflation
  • According to the opinion expressed by several board members, the overall evolution of core inflation continues to show inflationary pressures on demand and salary costs, in line with the cyclical position of the economy and a boosting private consumption in the fourth quarter of 2018 – probably extended in the first quarter of 2019 – as well as a large increase in the annual rhythm of the unitary unit labour cost in the manufacturing sector in the first months of the year.
  • Some members of the board have stressed that tensions on labour market foster the increase of unit labour costs and, implicitly, inflationary pressures, and noted that this is a general phenomenon in emerging economies in Central and Eastern Europe.
  • With regard to future developments, board members have indicated that the annual inflation will probably remain this year above the target range, above the previously projected levels, then would return to the forecasted level published in the February 2019 Inflation Report. It is expected to reach 2 percentage points in December 2019 and 3.4 percentage points at the end of the projection horizon, compared to the corresponding levels previously forecasted at 3.0 percentage points and 3.1 percentage points, respectively.

On monetary conditions: problems of liquidity control and mechanism of monetary policy transmission

  • In the discussions on monetary conditions, board members emphasised on the increase registered in April by the main ROBOR quotes – implicitly their positive spread over the monetary policy rate – but also the relatively broader rise in the interest rate on interbank money market transactions, followed, though, in May by a downward adjustment, even under the central bank’s control of liquidity in the money market made by attracting fixed-term deposits.
  • The high uncertainties generated in this context by the entry into force, as of May 2nd, of the level of 2.36 percentage point of the new benchmark index for loans granted to the population were highlighted, IRCC – calculated based on data from the fourth quarter of 2018 and applicable in the second quarter of 2019 – and the implications of this change on the transmission and conduct of the monetary policy, and in the end on the whole framework of this policy.
  • A balanced mix of policies is also necessary for a controlled adjustment in the current account deficit. At the same time, it was estimated that, given macroeconomic conditions, as well as internal and external risks, a stronger control over the money market liquidity is essential.
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