NATIONAL BANK OF ROMANIA

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2 Annual inflation rate fell into the lower half of the variation band around the target at end-213, 7 percent 6 5 annual inflation rate target 3.% 212 target 3.% Multi-annual flat inflation target 2.5% Dec.11 Dec.12 Dec.13 Dec.14 Note: Variation band is ±1 percentage point around the central target. Source: NIS, NBR 2

3 percent while the average annual rate has followed a less fluctuating path monthly change annual change average annual change CPI monthly change annual change average annual change HICP percent Feb.12 Mar.12 Apr.12 May.12 Jun.12 Jul.12 Aug.12 Oct.12 Nov.12 Dec.12 Feb.13 Mar.13 Apr.13 Jun.13 Jul.13 Aug.13 Feb.12 Mar.12 Apr.12 May.12 Jun.12 Jul.12 Aug.12 Oct.12 Nov.12 Dec.12 Feb.13 Mar.13 Apr.13 Jun.13 Jul.13 Aug.13 Source: Eurostat, NIS

4 Determinants of annual inflation in 213 Above-average agricultural output A favourable base effect associated with the poor crop in 212 VAT rate cut from 24 percent to 9 percent for bread, flour and other bakery products Persistence of the negative output gap Improved inflation expectations Nominal leu appreciation versus the US dollar; relatively stable evolution of EUR/RON rates 4

5 A pronounced favourable base effect on VFE dynamics, enhanced by the bumper crop in annual change (%) 2 VFE monthly change (%) contribution to monthly rate (pp) eggs (rhs) vegetables (rhs) fruits (rhs) VFE Feb.12 Mar.12 Apr.12 May.12 Jun.12 Jul.12 Aug.12 Oct.12 Nov.12 Dec.12 Feb.13 Mar.13 Apr.13 Jun.13 Jul.13 Aug.13 Source: NIS, NBR calculations 5

6 Steep decrease in agri-food commodity prices Wheat Maize Sunflower 35 3 EUR/tonne Paris commodity exchange Paris commodity exchange EUR/tonne EUR/tonne Domestic market (rhs) %, 21 = ρ =.87 Domestic market* Futures prices ρ =.88 Domestic market* Futures prices International prices ρ =.89 Futures prices Jan.11 May.11 Sep.11 May.12 Jan.14 Jan.11 May.11 Sep.11 May.12 Jan.14 Jan.11 May.11 Sep.11 May.12 Jan.14 * Prices on the representative markets in Muntenia Source: Bloomberg, MARD, NIS 6

7 with a limited pass-through into processed food prices Change in the consumer price Response of milling and bakery product prices Response of edible oil price Response of brown sugar price % % % Equilibrium Equilibrium Equilibrium Wheat Wheat Sunflower Sunflower Brown sugar Brown sugar price price seed price seed price price price Deviation from the equilibrium Note: The analysis used a threshold vector error correction model (TVECM), based on the data sample for 23 M5 213 M8 Source: Bloomberg, NIS, NBR estimates 7

8 The annual core inflation rate went down to historical lows, also due to the cut in the VAT rate for bakery products 8

9 A relatively stable evolution of the exchange rate against the euro, with the risk premium standing at post-crisis lows Exchange Rate Risk Premia (CDS spreads, 5 years) December 211=1, % 55 basis points EUR/RON EUR/PLN EUR/CZK EUR/HUF 5 45 basis points RO HU PL (rhs) CZ (rhs) Jul.12 Aug.12 Oct.12 Nov.12 Dec.12 Feb.13 Mar.13 Apr.13 Jun.13 Jul.13 Aug.13 Oct.13 Jul.12 Aug.12 Oct.12 Nov.12 Dec.12 Feb.13 Mar.13 Apr.13 Jun.13 Jul.13 Aug.13 Oct.13 Source: NBR, Bloomberg 9

10 Fuel prices put no pressure in 213, while futures prices hint at a further similar trend Source: NIS, Bloomberg, NBR calculations 1

11 Domestic demand is recovering slowly, 11

12 with signs of some financing sources being restored, Household loans Household time deposits Average gross wage 1 annual change, % 4 annual change, % annual change, % deposits (stock), lei deposits (stock), forex loans (stock), lei loans (stock), forex annual change, % new loans, lei new loans, forex annual change, % new deposits, lei new deposits, forex I 21 III I 211 III I 212 III I 213 III -1-2 I 21 III I 211 III I 212 III I 213 III I 21 III I 211 III real, economy-wide real, private sector nominal, economy-wide nominal, private sector I 212 III I 213 III Source: NIS, NBR calculations 12

13 18 percent per annum, monthly average and the adjustment of the new loan costs likely to support this development percent per annum NBR policy rate interest rate on new lei-denominated loans to households interest rate on new lei-denominated loans to companies average annual effective interest rate on new consumer loans, lei average annual effective interest rate on new mortgage loans, lei 13 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.11 Mar.11 May.11 Jul.11 Sep.11 Nov.11 Mar.12 May.12 Jul.12 Nov.12 Mar.13 Jul.13 Nov.13 Source: NBR Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.11 Mar.11 May.11 Jul.11 Sep.11 Nov.11 Mar.12 May.12 Jul.12 Nov.12 Mar.13 Jul.13

14 7 6 Inflation expectations have seen an improvement across both economic agents balance of answers, 3M moving average (%) consumers* Expectations over the next three months retail trade balance of answers, 3M moving average (%) industry construction services Jan.11 Apr.11 Jul.11 Oct.11 Apr.12 Jul.12 Oct.12 Apr.13 Jul.13 Oct.13 Jan.11 Apr.11 Jul.11 Oct.11 Apr.12 Jul.12 Oct.12 Apr.13 Jul.13 Oct.13 * Expectations over the next 12 months Source: EC-DG ECFIN 14

15 and financial analysts Annual inflation rate expectations over the next 12 months Annual inflation rate expectations over the next 24 months annual change, % annual change, % median median band interval-ţintă around the target band around the target Source: NBR survey among financial analysts Feb.12 Mar.12 Apr.12 May.12 Jun.12 Jul.12 Aug.12 Oct.12 Nov.12 Dec.12 Feb.13 Mar.13 Apr.13 Jun.13 Jul.13 Aug.13 Oct.13 Feb.12 Mar.12 Apr.12 May.12 Jun.12 Jul.12 Aug.12 Oct.12 Nov.12 Dec.12 Feb.13 Mar.13 Apr.13 Jun.13 Jul.13 Aug.13 Oct.13

16 The current projection places the annual CPI inflation rate at 1.8 percent at end-213 and 3. percent at end-214, i.e. 1.3 percentage points and.1 percentage point, respectively, below the August 213 Inflation Report projected rates Annual CPI inflation forecast annual percentage change uncertainty interval annual CPI inflation rate (previous round) annual CPI inflation rate central target (2.5 percent as of 213) variation band The projected trajectory is seen temporarily falling below the lower bound of the variation band around the central target in 214 H1 and remaining thereafter inside the band until the projection horizon The uncertainty interval is calculated based on the forecast errors of the annual CPI inflation rate in the NBR projections during The magnitude of forecast errors is positively correlated to the time horizon to which they refer. Source: NIS, NBR calculations and projections

17 Annual CPI inflation forecast (2) Components contribution to the annual inflation forecast Dec./Dec. a year earlier 17

18 The downward revision of the end-213 inflation forecast is mainly the result of the materialisation of short-term risks mentioned in the previous projection 18

19 Significant influence of base effects on the annual inflation rate in

20 Transitory impact of the VAT rate cut applied to some bakery products 7 annual percentage change annual percentage change 6 5 CPI adjusted CORE2 4 Sep.'13 Sep.'14 3 Sep.'13 Sep.' pp.5 Projection Projection without VAT 1.2 pp Source: NIS, NBR calculations Mar.12 May.12 Jul.12 Nov.12 Mar.13 Jul.13 Nov.13 Jan.14 Mar.14 May.14 Jul.14 Sep.14 Nov.14 Mar.12 May.12 Jul.12 Nov.12 Mar.13 Jul.13 Nov.13 Jan.14 Mar.14 May.14 Jul.14 Sep.14 Nov.14

21 The annual inflation rate will hit historical lows in percent monthly change annual change average annual change CPI projection monthly change annual change average annual change HICP projection percent Mar.12 May.12 Jul.12 Nov.12 Mar.13 Jul.13 Nov.13 Jan.14 Mar.14 May.14 Jul.14 Sep.14 Nov.14 Mar.12 May.12 Jul.12 Nov.12 Mar.13 Jul.13 Nov.13 Jan.14 Mar.14 May.14 Jul.14 Sep.14 Nov.14 Note: The HICP monthly change has been approximated by the CPI monthly rate for the forecast interval. Source: NIS, NBR projection

22 External assumptions underlying the projection The economic growth scenario for Romania s trade partners* was revised downwards compared to the levels presented in the previous projection round for most of the forecasting interval The average annual increases in the Harmonised Index of Consumer Prices (HICP) for the euro area are projected to remain below the 2 percent price stability benchmark, being revised only marginally against the previous projection The 3M EURIBOR rate is projected to remain at low levels relative to historical standards, reflecting the persistently accommodative ECB monetary policy stance % * Effective indicator, calculated based on the breakdown of Romanian exports by recipient EU Member State. Source: NBR assumptions based on data provided by the European Commission, Consensus Economics and futures prices Effective EU economic growth* Annual euro area inflation August 213 IR November 213 IR 3M EURIBOR USD/barrel Brent oil price (rhs)

23 Exogenous pressures on inflation The scenario on annual developments in administered prices: is based on the deregulation calendars on the natural gas and electricity markets released by ANRE the Romanian Energy Regulatory Authority and the electricity prices published by OPCOM the Romanian gas and electricity market operator foresees an upward revised path, following a smaller cut in the electricity price than previously envisaged for July 213 The forecasted dynamics of volatile food prices (VFE): incorporate the impact of this year s bumper crops draw on the standard assumption of normal agricultural years in 214 and Administered prices annual inflation Source: NIS, NBR projections 213 August 213 IR 214 Volatile food prices annual inflation 213 end of period (%) November 213 IR end of period (%) August 213 IR November 213 IR

24 Revision of the output gap projection compared to the previous round Factors Real broad monetary conditions: adequate for the inflation rate remaining inside the band around the target over the medium term, paving the way for gradual lending recovery Upwards/ Downwards* External demand Discretionary component of fiscal policy (fiscal impulse) GDP deviation % against potential GDP August 213 IR November 213 IR Marginal revaluation** of the output gap at the starting point of the projection (213 Q4) *) The downwards arrows show influences entailing a wider than previously projected negative output gap. **) Stemming from the NIS-revised GDP data series Source: NBR projection and estimates

25 Revision of the annual adjusted CORE2 inflation projection compared to the previous round Downward revision throughout the projection interval due to: favourable supply-side shocks in 213 (cut in the VAT rate for some bakery products and the confirmed bumper crop) whose transitory impact is expected to last until mid-214 economic agents lower inflation expectations given the transitory incorporation of the successive price cuts in the recent past the GDP deviation being projected at more disinflation-supportive levels throughout the forecast interval the marginal downward revision of imported inflation in the latter half of the projection interval, on the back of developments in external prices Slightly more unfavourable influences come from import prices in 214 H1 211 Adjusted CORE2 annnual inflation 212 Source: NIS, NBR projections 213 end of period (%) August 213 IR November 213 IR

26 Determinants of annual adjusted CORE2 inflation projection Starting from a lower level at end-213, inflation expectations* will subsequently experience a trend reversal, as a result of economic agents perceiving the gradual fading away of base effects associated with the recent favourable supply-side shocks The negative output gap exerts disinflationary pressures throughout the projection interval, which however tend to abate somewhat, amid the stronger recovery in economic activity The dynamics of import prices have a relatively small and steady contribution to the annual adjusted CORE2 inflation throughout the projection interval *) backward- and forward-looking Note: The annual adjusted CORE2 inflation is calculated as a quarterly average, in line with its econometrically-modelled determinants. Source: NBR calculations 26

27 Potential causes for inflation to deviate from the projected path Causes Euro area economic performance and the ongoing sovereign debt sustainability issues: volatility of capital flows to new EU Member States, given the ongoing/heightened deleveraging and the leading central banks decisions changes in the EUR/RON exchange rate and the effects of the EUR/USD rate on the USD/RON rate Uncertainties about the firm and consistent implementation of structural reforms, in line with the calendars agreed with international institutions (the EU, the IMF and the World Bank) in the context of the busy election calendar for 214 Increases in excise duties on certain categories of goods, included in the EU-IMF-WB arrangement Commodity prices on global markets (agricultural products, oil) and domestic food prices (weather conditions) Administered price dynamics (assessment conditioned by the currently available data) Balance of risks Tilted to the upside Tilted slightly to the upside Tilted to the upside Short term: in equilibrium Medium term: upside risk In equilibrium The materialisation of any upside risk might rekindle inflation expectations, with adverse effects on consumer prices. 27

28 Decisions of the NBR Board* To lower the monetary policy rate to 4. percent per annum from 4.25 percent starting with 6 November 213 To pursue an adequate liquidity management in the banking system To maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currencydenominated liabilities of credit institutions *) meeting of 5 November

29 Calendar of NBR Board meetings on monetary policy issues 8 January February 214* *) review and approval of the quarterly Inflation Report 29

30 At the end of the press conference, the following will be available on the NBR website ( and YouTube ( Inflation Report November 213 (in Romanian) Summary of the Inflation Report November 213 (in English) e-pub versions of the Summary of the Inflation Report (in Romanian and English) PowerPoint presentation delivered by the NBR Governor 3