NATIONAL BANK OF ROMANIA

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2 Annual inflation rate remained relatively stable during 13, 7 percent 6 5 annual inflation rate 4 3 annual adjusted CORE inflation rate 1 11 target 3.% 1 target 3.% Multi-annual flat inflation target:.5% Dec.11 Dec.1 Dec.13 Dec.14 Note: Variation band is ±1 percentage point around the central target. Source: NIS, NBR

3 with its level being explained mostly by the supply-side shocks in the previous quarters 3

4 Core inflation remained on a downward trend in, despite the temporary rise in June 4

5 ascribable mainly to the depreciation of the leu, in the context of an episodic increase in investors risk aversion across most emerging economies Exchange Rate Risk Premia (CDS spreads, 5 years) 11 index, 31 December 11=1, % 55 5 basis points RO HU basis points PL (rhs) CZ (rhs) Jul.1 Aug.1 Sep.1 Oct.1 Nov.1 Dec.1 Jan.13 Feb.13 Mar.13 EUR/RON EUR/PLN EUR/CZK EUR/HUF Apr.13 May.13 Jun.13 Jul Jul.1 Aug.1 Sep.1 Oct.1 Nov.1 Dec.1 Jan.13 Feb.13 Mar.13 Apr.13 May.13 Jun.13 Jul Source: BNR, Bloomberg 5

6 Overall, the exogenous components no longer generated significant inflationary pressures in, annual change (%) contributions to the annual inflation rate (pp) Source: NIS, NBR calculations non-core items Apr. May Jun. Jul. Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun administered prices fuels non-core items (rhs) tobacco & alcohol VFE monthly change (%) VFE Slightly faster annual rate at end- owing to a base effect, although the spike in May, induced by seasonal vegetable prices, was almost entirely reversed in June Fuels Evolution supportive of disinflation in April and May Opposite influence in June, as a result of the hike in crude oil prices and the depreciation of the leu against the US dollar Tobacco and alcohol Temporarily faster price dynamics, following the increase in excise duties in April instead of July as initially scheduled 6

7 but the magnitude of previous shocks caused two thirds of annual inflation to be ascribable to non-core components June 13 7

8 Consumer demand recovery is slow in coming 3 % % faţă of de potential PIB potenţial GDP 1 real annual change (%) 1 contributions, points points, 3 month moving average Expectations over the next 1 months Deviaţia Output gap PIB retail sales (excl. auto sector) household final consumption savings unemployment rate general economic situation financial situation consumer confidence (rhs) I 11 II III IV I 1 II III IV I 13-1 Jan.11 Mar.11 May.11 Jul.11 Sep.11 Nov.11 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.13 Mar.13 May.13-1 Jan.11 Mar.11 May.11 Jul.11 Sep.11 Nov.11 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.13 Mar.13 May.13 Jul.13-1 Sursa: Source: INS, NIS, estimări NBR estimates BNR Source: NIS, NBR Source: EC-DG ECFIN 8

9 in the absence of favourable developments in terms of financing channels, Consumer loans and disposable income Number of employees Gross wage 4 real annual change (%) 8 annual change (%) annual change (%) private sector economy-wide quarterly change**, % Jan.11 Mar.11 May.11 Jul.11 Sep.11 Nov.11 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.13 Mar.13 May.13 * NBR estimates disposable income* (3 month moving average) consumer loans (stock) Source: NIS, NBR calculations private sector -3 economy-wide -4 I II III IV I II III IV I II III IV I II*** * date ajustate sezonier; ** apr.-mai ** seasonally adjusted Sursa: ANOFM, 13 data; *** April-May INS, calcule BNR I 1 real, economy-wide real, private sector nominal, economy-wide nominal, private sector II III IV I II III IV I II III IV I II

10 with net exports acting as the engine of economic growth in Q1 1

11 Annual CPI inflation forecast (1) The current projection places the annual CPI inflation rate at 3.1 percent at end-13 and end-14,.1 and. percentage points respectively below the May 13 Inflation Report projected rates annual percentage change uncertainty interval annual CPI inflation rate (previous round) annual CPI inflation rate central target variation band The projected path is seen remaining inside the variation band around the central target until the projection horizon, touching a.1 percent low in 14 Q The uncertainty interval is calculated based on the forecast errors of the annual CPI inflation rate in the NBR projections during 5-1. The magnitude of forecast errors is positively correlated to the time horizon to which they refer. Source: NIS, NBR calculations and projections Multi-annual flat inflation target:.5%

12 Annual CPI inflation forecast () Components contribution to the annual inflation forecast Dec./Dec. a year earlier Source: NIS, NBR projections 1

13 External assumptions underlying the projection The economic growth scenario of Romania s trade partners* has been revised downwards compared to the previous projection round Against this background, the demand deficit in the effective EU is forecasted to exert stronger disinflationary pressures on the annual HICP inflation rate, which has been revised downwards and is seen standing below the percent level consistent with price stability both in 13 and in 14 The 3M EURIBOR rate is projected to stick to low levels by historical standards, reflecting the ECB s accommodative monetary policy * 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 Bloomberg futures prices. 13

14 The scenario on annual changes in administered prices: Exogenous pressures on inflation is based on the deregulation calendars on the natural gas and electricity markets released by ANRE the Romanian Energy Regulatory Authority (uncertain magnitudes, especially in the case of electricity) and on electricity prices published by OPCOM the Romanian gas and electricity market operator incorporates downward-revised quarterly values, exclusively on account of reassessing the assumptions regarding electricity price dynamics The forecasted dynamics of volatile food prices (VFE): assume normal agricultural years in 13 and 14 are seen declining considerably in 13 Q3, prompted by the fading-out of the detrimental impact of the 1 weak harvest and hence by a favourable statistical base effect becoming manifest Source: NIS, NBR projections Administered prices annual inflation Volatile food prices annual inflation 1 13 end of period (%) May 13 IR August 13 IR end of period (%) May 13 IR August 13 IR

15 Revision of the output gap projection compared to the previous round Factors Upwards/ Downwards* GDP deviation % against potential GDP May 13 IR Real broad monetary conditions: adequate for the inflation rate returning and remaining inside the target band and for the gradual recovery of lending August 13 IR - External demand from effective EU partners Discretionary component of fiscal policy (fiscal impulse) The revision of the historical data series on real GDP by the NIS, implying a narrower negative output gap in the initial quarter of the projection Incorporation of the likely impact of the use of European funds *) The upward arrows show influences entailing a narrower than previously projected negative output gap Source: NBR projections and estimates

16 Determinants of annual adjusted CORE inflation projection Inflation expectations* are seen following a downward trend over the projection interval, thanks to favourable base effects associated with the fading out of the 1 adverse supply-side shocks and to an adequate monetary policy stance tailored to the overall macroeconomic picture The impact of the negative output gap is anticipated to weaken slightly throughout the forecast interval, given the revision of the historical GDP series and the gradual consolidation of domestic economic activity The dynamics of import prices are expected to have a favourable contribution at the onset of the projection interval, followed by an unfavourable one for the rest of the period *) backward- and forward-looking Note: The annual adjusted CORE inflation is calculated as a quarterly average, in line with its econometrically-modelled determinants. Source: NBR calculations 16

17 Smaller anticipated influence of several exogenous components Annual inflation rate, June 13: 5.4% contribution to the annual rate, pp adjusted CORE food items octane petrol price EUR per litre with taxes without taxes. 1.8 components outside the scope of monetary policy 3.7 adjusted CORE non-food items.4 adjusted CORE services.3 with taxes: EU 8 average percentage change Tobacco product price pp. without taxes: EU 8 average excise duty tobacco product price* contribution to the inflation rate (rhs) * at constant rates of exchange Source: NIS, MPF, EC, NBR calculations. RO EE PL BG LU LV CY LT HR AT CZ HU MT ES SK SI FR IE UK BE PT DE FI SE DK GR NL IT.. 17

18 Impact of the energy market deregulation Electricity triggers of upward/downward price changes Active energy starting July 13, the price consists of: the regulated component set by the ANRE and usually announced shortly before implementation the free market component (FMC), which hinges on developments on the free market the FMC share will increase gradually in nine stages by end-17, when the deregulation process is scheduled to be completed The invoicing of green certificates as: the annual mandatory purchase quota determined by the ANRE multiplied by the weighted average trading price for green certificates published by the OPCOM the Romanian electricity market operator Cogeneration contribution: set by the ANRE on an annual basis The larger share of market components in setting electricity tariffs may generate both-way price changes (e.g., the significant drop in the value of green certificates on the OPCOM market in 13 ) 18

19 Favourable trends in agricultural commodity prices Wheat Maize Sunflower 35 3 EUR/tonne Paris commodity exchange Paris commodity exchange EUR/tonne EUR/tonne International prices %, 1 = Futures prices Futures prices Futures prices ρ =.89 Domestic market* Jan.9 Aug.9 Mar.1 Oct.1 May.11 Dec.11 Jul.1 Feb.13 Sep.13 ρ =.89 Domestic market* Jan.9 Jul.9 Jan.1 Jul.1 Jan.11 Jul.11 Jan.1 Jul.1 Jan.13 Jul.13 Jan Domestic market (rhs) ρ =.9 Jan.9 Aug.9 Mar.1 Oct.1 May.11 Dec.11 Jul.1 Feb.13 Sep * Prices on the representative markets in Southern Romania Source: Bloomberg, MARD, NIS 19

20 Crude oil futures prices do not indicate significant inflationary pressures from fuel prices Source: NIS, Bloomberg, NBR calculations

21 Inflation expectations stay within the target-band on both horizons Annual inflation rate expectations over the next 1 months Annual inflation rate expectations over the next 4 months annual change (%) annual change (%) median median target-band target-band Source: NBR survey among bank analysts 1 Mar.1 Apr.1 May.1 Jun.1 Jul.1 Aug.1 Sep.1 Oct.1 Nov.1 Dec.1 Jan.13 Feb.13 Mar.13 Apr.13 May.13 Jun.13 Jul.13 Mar.1 Apr.1 May.1 Jun.1 Jul.1 Aug.1 Sep.1 Oct.1 Nov.1 Dec.1 Jan.13 Feb.13 Mar.13 Apr.13 May.13 Jun.13 Jul.13

22 Potential causes for inflation to deviate from the projected path Causes Volatility of capital flows to emerging economies in Europe, also in the context of recent shifts in global risk appetite volatility of the RON-EUR exchange rate and of foreign investor sentiment towards Romania External developments: uncertainty surrounding the time horizon needed for EU economic recovery, given the persistence of sovereign debt sustainability issues in some euro area countries and the balance sheet adjustments still required of economic agents in both public and private sectors Uncertainties regarding the firm and consistent implementation of structural reforms, in line with the calendars agreed with international institutions (EU, IMF and the World Bank) The price dynamics of volatile food items (VFE) and processed food, also as a result of the recent announcement on cutting the VAT rate applied to flour and bread to 9 percent Administered price dynamics (assessment conditional upon the information available so far) Balance of risks Tilted to the upside Tilted to the upside In the short term: tilted to the downside In equilibrium The materialisation of any upside risk might rekindle inflation expectations, with adverse effects on consumer prices.

23 Decisions of the NBR Board* To lower the monetary policy rate to 4.5 percent per annum from 5. percent starting with 6 August 13 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 August 13 3

24 Calendar of NBR Board meetings on monetary policy issues 3 September 13 5 November 13* 8 January 14 4 February 14* *) review and approval of the quarterly Inflation Report 4

25 At the end of the press conference, the following will be available on the NBR website ( and on Youtube ( Inflation Report August 13 (in Romanian) Summary of the Inflation Report August 13 (in English) e-pub versions of the Summary of the Inflation Report (in Romanian and English) PowerPoint presentation of the NBR Governor 5