Press Conference. Inflation Report. August Mugur Isărescu. Governor

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1 Press Conference Inflation Report August 217 Mugur Isărescu Governor Bucharest, 8 August 217 1

2 The annual CPI inflation rate accelerated in annual change, % Inflation target: 2.5% ±1pp Determinants Pick-up in production costs, particularly in food industry Rise in excess aggregate demand -2 Increase in natural gas prices and augmentation of the support scheme for producers of electricity from renewable sources Jan.15 Mar.15 CPI adjusted CORE2 CPI (constant tax rates) adjusted CORE2 (net of the direct effect of VAT rate changes) May.15 Jul.15 Sep.15 Nov.15 Jan.16 Mar.16 May.16 Jul.16 Sep.16 Nov.16 Jan.17 Mar.17 May.17 Jun.17 Temporary supply-side shocks on prices for citrus and other Southern fruit Hike in tobacco product prices, only partly justified by the anticipated change in the excise duty Correction of international oil prices Source: NIS, NBR calculations and estimates 2

Price increases were reported for most items in the CPI basket 1 8 Diffusion index Jul. 21: standard VAT rate of 2% annual change at constant tax rates in June 217, % 6 2-2 - -6 Sep.

17 Note: The diffusion index is calculated as the difference between the shares in the CPI basket of goods and services with positive monthly inflation rates and those with negative rates (1%

217: standard VAT rate of 19% Jun.17 Legend: 1. Energy 2. Meat and meat products 3. Fuels. Hygiene and cosmetic items 5. Post and telecommunications 6. Milling and bakery products 7. Tobacco 8.

3 Price increases were reported for most items in the CPI basket 1 8 Diffusion index Jul. 21: standard VAT rate of 2% annual change at constant tax rates in June 217, % Sep. 213: VAT rate of 9% for bread 12-month moving average Jan.8 Jul.8 Jan.9 Jul.9 Jan.1 Jul.1 Jan.11 Jul.11 Jan.12 Jul.12 Jan.13 Jul.13 Jan.1 Jul.1 Jan.15 Jul.15 Jan.16 Jul.16 Jan.17 Note: The diffusion index is calculated as the difference between the shares in the CPI basket of goods and services with positive monthly inflation rates and those with negative rates (1% coverage of the CPI basket). Changes do no exclude the effects of tax measures. Source: NIS, NBR calculations and estimates Jun. 215: VAT rate of 9% for food Jan. 216: standard VAT rate of 2% Jan. 217: standard VAT rate of 19% Jun.17 Legend: 1. Energy 2. Meat and meat products 3. Fuels. Hygiene and cosmetic items 5. Post and telecommunications 6. Milling and bakery products 7. Tobacco 8. Milk and dairy products 9. Clothing 1. Vegetables 11. Water, sewerage, sanitation 12. Footwear 13. Chemicals 1. Cultural and sporting products 15. Fruits 16. Household appliances, furniture 17. Cinemas 18. Sugar and confectionery 19. Medical care 2. Fish and fish products Note: Products hold 86% of households' CPI basket in 217. A rectangular area is proportional to the product s share in the CPI basket. 3

4 Built-up domestic pressures start to pass through into producer prices, once the disinflationary influence of external environment fades out 3 annual change, % annual change, % annual change, % annual change, % 1 2 unit wage costs non-durables*! A change in producer prices of unit wage costs durables* consumer goods feeds through into core inflation in a proportion aggregate commodity index (rhs) of 7% over 1 year industrial producer prices consumer goods, domestic market adjusted CORE2, net of the direct effect of VAT rate changes (rhs) Q1 27 Q 28 Q Q1 21 Q 211 Q Q1 213 Q 21 Q Q1 216 Q Q1 27 Q 28 Q Q1 21 Q 211 Q Q1 213 Q 21 Q Q1 216 Q 217 *) the April-May average was considered for 217 Source: Eurostat, IMF, NIS, NBR calculations and estimates

5 The trend is driven by food items; robust demand facilitates the pass-through into final prices 2 annual change, %, 3-month moving average annual change, %, 3-month moving average index, Jan.21=1, s.a. annual change, % 3.5 consumer prices processed food items (rhs) turnover volume of trade in food items* producer prices food industry (rhs) FAO food price index unit wage costs food industry Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.15 Mar.15 May.15 Jul.15 Sep.15 Nov.15 Jan.16 Mar.16 May.16 Jul.16 Sep.16 Nov.16 Jan.17 Mar.17 May.17 Jun.17 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.15 Mar.15 May.15 Jul.15 Sep.15 Nov.15 Jan.16 Mar.16 May.16 Jul.16 Sep.16 Nov.16 Jan.17 Mar.17 May.17 Jun.17 Source: NIS, FAO, NBR calculations and estimates *) including tobacco products 5

6 Higher energy prices in have reverted the downtrend in the annual dynamics of administered prices annual change, % 1. contributions, pp monthly change (constant tax rates), % gas market deregulation mandatory quota for green certificates administered prices administered prices (constant tax rates) electricity gas other administered prices total (rhs) Jan.15 Mar.15 May.15 Jul.15 Sep.15 Nov.15 Jan.16 Mar.16 May.16 Jul.16 Sep.16 Nov.16 Jan.17 Mar.17 May.17 Jun.17 Apr.16 May.16 Jun.16 Jul.16 Aug.16 Sep.16 Oct.16 Nov.16 Dec.16 Jan.17 Feb.17 Mar.17 Apr.17 May.17 Jun.17 Source NIS, NBR estimates 6

7 12 9 USD/barrel Slowdown in the annual dynamics of fuel prices, as a result of the correction in crude oil prices in 217 Crude oil prices annual rate (rhs) actual level percent contributions, pp Domestic fuel prices USD/RON exchange rate* Brent oil prices* other annual rate (rhs) %, constant taxes Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.15 Mar.15 May.15 Jul.15 Sep.15 Nov.15 Jan.16 Mar.16 May.16 Jul.16 Sep.16 Nov.16 Jan.17 Mar.17 May.17 Jul.17 Jan.15 Mar.15 May.15 Jul.15 Sep.15 Nov.15 Jan.16 Mar.16 May.16 Jul.16 Sep.16 Nov.16 Jan.17 Mar.17 May.17 Jun.17 Source:Bloomberg, NIS, NBR calculations and estimates *) contributions include both contemporaneous and lagged effects 7

8 EUR/RON exchange rate movements decoupled from regional developments Exchange rate Risk premia (CDS spreads, 5 years) index, 31 December 215=1 HUF/EUR PLN/EUR RON/EUR CZK/EUR basis points Romania Hungary Poland Czech Republic Jan.16 Feb.16 Mar.16 Apr.16 May.16 Jun.16 Jul.16 Aug.16 Sep.16 Oct.16 Nov.16 Dec.16 Jan.17 Feb.17 Mar.17 Apr.17 May.17 Jun.17 Jan.16 Feb.16 Mar.16 Apr.16 May.16 Jun.16 Jul.16 Aug.16 Sep.16 Oct.16 Nov.16 Dec.16 Jan.17 Feb.17 Mar.17 Apr.17 May.17 Jun.17 Source: ECB, Reuters

9 Increase in excess aggregate demand in the economy; labour market indicators near or turn more favourable than pre-crisis levels Cyclical position of the economy Labour market conditions 8 % of potential GDP..3.2 [-] newly unemployed (thou. persons) gross real wage (yoy) no. of employees (yoy) employment expectations (balance of answers) job vacancy rate - -8 output gap labour market tightness indicator* (rhs) 26 Q1 26 Q 27 Q Q1 29 Q 21 Q Q1 212 Q 213 Q Q1 215 Q 216 Q3 217 f.1. ULC ind. (yoy) [-] persons available to work but not actively seeking (thou. persons) [-] ILO unemployment rate [-] layoffs (thou. persons) *) calculated as a ratio of job vacancy rate to ILO unemployment rate Note: The shift towards 1 indicates labour market tightening; f) forecast the chart presents the positioning of indicators at the 3 moments in the interval defined by the most unfavourable () Source: NEA, EC-DG ECFIN, Eurostat, NIS, NBR calculations and estimates and the most favourable (1) values in the period. 9

10 The growth pace of household consumption is similar to the pre-crisis levels; similar levels of confidence and purchasing power dynamics Household consumption Trade 2 16 percent household consumption (quarterly change, s.a.) net real wage (annual change) points, s.a. 5 annual change, % consumer confidence* (rhs) non-durables durables (excl. auto) auto Q1 27 Q3 28 Q1 28 Q3 29 Q1 29 Q3 21 Q1 21 Q3 211 Q1 211 Q3 212 Q1 212 Q3 213 Q1 213 Q3 21 Q1 21 Q3 215 Q1 215 Q3 216 Q1 216 Q3 217 Q Q Q3 212 Q 213 Q Q3 213 Q 21 Q Q3 21 Q 215 Q Q3 215 Q 216 Q Q3 216 Q 217 Q1 217 ** *) change from the historical average, **) the April-May average was considered for 217 Source: NIS, EC-DG ECFIN, NBR calculations 1

11 Low interest rates and the decrease in risk aversion contribute to enhancing the role of lending in boosting demand 6 lei bn. Consumer loans stock lei bn., 12-month cumulative flow flow (rhs)* 2 65 lei bn. Housing loans lei bn., 12-month cumulative flow stock flow (rhs)* 12 Interest rate on leu-denominated loans to households %, p.a., flow consumer loans housing loans 3M ROBOR Dec.15 Feb.16 Apr.16 Jun.16 Aug.16 Oct.16 Dec.16 Feb.17 Apr.17 Jun.17 *) excl. renegotiated loans Dec.15 Feb.16 Apr.16 Jun.16 Aug.16 Oct.16 Dec.16 Feb.17 Apr.17 Jun Q Q3 21 Q 215 Q Q3 215 Q 216 Q Q3 216 Q 217 Q1 217 Source: NBR 11

12 12 8 The capacity utilisation rate stands above the long-term average in most industrial groupings, but investment is sluggish Capacity utilisation rate by main industrial grouping* -quarter moving average, %, s.a. intermediate goods capital goods durables non-durables! Expansion of production capacities in the auto industry real annual change, % Investment real annual change, % ! Levels below the long-term average and the downward trend reflect the competitive pressure from imports GFCF (rhs) equipment civil engineering works residential buildings non-residential buildings Q1 28 Q3 29 Q1 29 Q3 21 Q1 21 Q3 211 Q1 211 Q3 212 Q1 212 Q3 213 Q1 213 Q3 21 Q1 21 Q3 215 Q1 215 Q3 216 Q1 216 Q3 217 Q1 21 Q Q3 21 Q 215 Q Q3 215 Q 216 Q Q3 216 Q 217 Q1 217 ** *) difference from the long-term average (25 Q1 217 Q1) **) April-May 217 Source: NIS, NIS-DG ECFIN survey 12

13 Uptrend in inflation expectations over horizons up to 1 year; stability inside the variation band of the target over the 2-year horizon Expectations of economic agents* Expectations of financial analysts 2 3-month moving average, balance of answers, % annual change, % 6 15 trade industy inflation rate 1 year ahead inflation rate 2 years ahead consumers construction Inflation target Jan.15 Mar.15 May.15 Jul.15 Sep.15 Nov.15 Jan.16 Mar.16 May.16 Jul.16 Sep.16 Nov.16 Jan.17 Mar.17 May.17 Jul.17 Source: EC-DG ECFIN survey, NBR survey among financial analysts Jan.15 Mar.15 May.15 Jul.15 Sep.15 Nov.15 Jan.16 Mar.16 May.16 Jul.16 Sep.16 Nov.16 Jan.17 Mar.17 *) 3-month horizon for economic agents and 12-month horizon for consumers; the annual inflation staying inside the ±5 percent band indicates price stability May.17 Jul.17 13

14 Annual CPI inflation forecast The annual CPI inflation rate is seen on the rise: Projected levels (in parentheses, differences from the May 217 IR): uncertainty interval annual CPI inflation rate (previous round) annual CPI inflation rate annual change, % (eop) percent in December 217 (up.3 pp) 3.2 percent in December 218 (up.1 pp) 3.5 percent in June 219, at the projection horizon central target for annual inflation (2.5 percent as of 213) variation band of the target annual CPI inflation rate at constant tax rates* Inflation target: 2.5% ±1pp 8 Annual CPI inflation rate is expected to re-enter the variation band of the target in 217 Q3 Calculated at constant tax rates, inflation rate will stand at 2.9 percent in December 217*, i.e. above the 2.5 percent central target Note: 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 with the time horizon they refer to. Source: NIS, NBR calculations and projections *) net of first-round effects of changes to indirect taxes (VAT and excise duties) and of scrapping some non-tax fees and charges in early 217, which impact annual CPI inflation rate until the beginning of

15 Components contribution to the annual inflation forecast Dec. year T/Dec. year T-1 percentage points 3.2% 3 1.9% tobacco products and alcohol.2.1 fuels -..2 VFE.5.2 administered prices.2. adjusted CORE CPI inflation Note: The values in the table have been rounded off to one decimal place. Source: NIS, NBR projections 15

16 External assumptions underlying the projection During the forecast interval, annual growth of the effective EU GDP* is expected to strengthen around 2 percent, with domestic demand foreseen to act as the main driver The average annual HICP inflation rate for the euro area is projected to remain subdued, below the 2 percent benchmark; over the forecast period, it is seen fluctuating, on the back of factors with temporary traction (energy prices) Oil price is projected to rise gradually, following a path lower than the previously-projected one under the impact of large inventories and despite the recent decisions to extend oil supply cuts 2.5 percent USD/barrel 7 USD/EUR May 217 IR August 217 IR Effective EU growth* Euro area annual inflation 3M EURIBOR Brent oil price (rhs) Annual average nominal EURUSD exchange rate -.3 *) external demand measure calculated based on the breakdown of Romania s exports by intra-eu country of destination Source: NBR assumptions based on data provided by the European Commission, Consensus Economics and Bloomberg (futures prices) 16

17 Exogenous pressures on inflation The projected dynamics of volatile food prices were: Significantly revised upwards in 217, amid the impact of adverse weather conditions in Europe on import prices for seasonal fruits, and subsequently seen standing at usual levels in the assumption of normal agricultural years domestically, being also influenced by group-specific seasonal effects The projected dynamics of administered prices are affected: Significantly this year by the measure on scrapping some non-tax fees and charges starting February 217, as well as by uncertainties about the evolution of such prices amid recent developments on the electricity market and the completion of liberalisation process by end Volatile food prices annual inflation 216 Source: NIS, NBR projections 217 %, end of period August 217 IR May 217 IR 218 Administered prices annual inflation %, end of period August 217 IR May 217 IR

18 Revision of the output gap projection compared to the previous forecasting round Factors Real GDP growth in 217 Q1, higher than anticipated in the previous forecasting round Revision impact on output gap* August 217 IR May 217 IR Output gap % of potential GDP 3 2 Fiscal and income policy stance External demand 1 Real broad monetary conditions: adequate for ensuring price stability over the medium term, helping achieve sustainable economic growth -1-2 *) the upward arrows show more stimulative influences on the output gap than in the previous forecasting round Source: NBR estimates and projections

19 Annual adjusted CORE2 inflation projection determinants Upward path, due largely to the build-up of domestic inflationary pressures: Increase in excess demand, amid expansionary fiscal policy stance and higher disposable income Rise in domestic producer prices, against the backdrop of expected further strong pressures coming from unit wage costs, in parallel with the dissipation of the disinflationary impact of global commodity prices Uptrend in inflation expectations*, under the impact of these factors Some inflationary pressures, albeit soft, are expected to come also from import prices for consumer goods, amid external price dynamics *) backward- and forward-looking Contributions to annual adjusted CORE2 inflation (pp) VAT import prices output gap inflation expectations annual adjusted CORE2 inflation rate, net of the VAT first-round effect (%) annual adjusted CORE2 inflation rate (%) Note: The annual adjusted CORE2 inflation is calculated as a quarterly average, in line with its econometrically-modelled determinants. Source: NBR calculations

20 Annual adjusted CORE2 inflation projection compared to the previous forecasting round The annual adjusted CORE2 inflation rate has been revised upwards for both end-217 and end-218, on the back of: The build-up of a stronger excess demand throughout the forecast interval, also favouring the pass-through into consumer prices of faster-than-previously-anticipated pick-up in production costs Annual adjusted CORE2 inflation August 217 IR August 217 IR (net of the VAT first-round effect) May 217 IR %, end of period Source: NIS, NBR projections

21 Potential causes for inflation to deviate from the projected path Causes External coordinates: uncertainties with regard to the impact that Brexit talks, the economic policies pursued by the US Administration and the monetary policy stances of the Fed and the ECB will have on the global macroeconomic coordinates and, thus, on the volatility of capital flows to emerging economies Balance of risks to the inflation path is assessed to be tilted to the upside In equilibrium the prospects for economic activity and inflation in the euro area/eu and across emerging economies (China in particular) Fiscal and income policies: the fiscal and income policy stance, amid uncertainties surrounding the implementation of the Framework Law on wages for staff paid from public funds, the new legislative initiatives on taxation set forth in the Government Programme, as well as the possible adoption of corrective fiscal measures to keep the budget deficit within the authorities targets Tilted to the upside Global commodity prices (energy, agri-food items) In equilibrium Administered price dynamics, conditional upon available information: uncertainties surrounding the magnitude of hikes in natural gas and electricity prices Tilted to the upside 21

22 Decisions of the NBR Board* To keep unchanged the monetary policy rate at 1.75 percent per annum To pursue adequate liquidity management in the banking system To maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions *) meeting of August

23 Calendar of monetary policy meetings of the NBR Board 3 October November 217 * 8 January February 218 * *) review and approval of the quarterly Inflation Report 23

24 At the end of the press conference, the following will be available on the NBR website ( Inflation Report August 217, full version (in Romanian) Summary of the Inflation Report August 217 (in English) e-pub versions of the Summary of the Inflation Report (in Romanian and English) Presentation delivered by the NBR Governor (also available as a video at 2

Press Conference. Inflation Report. May Mugur Isărescu. Governor

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