Press Conference. Inflation Report. May Mugur Isărescu. Governor

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1 Press Conference Inflation Report May 17 Mugur Isărescu Governor Bucharest, 15 May 17 1

2 The annual CPI inflation rate returned to positive territory at the onset of 17 4 annual percentage change Fiscal measures Determinants 1 Inflation target:.5% ± 1pp Fading-out of the statistical effect associated mainly with the standard VAT rate cut in early 1, largely offset by new changes in indirect taxes and the removal of some non-tax fees and charges Economic factors -1 Further uptrend of main commodity prices (crude oil, metals, some agri-food products) - - CPI adjusted CORE Rising prices of vegetables and fruits across Europe, amid unfavourable weather conditions Slight depreciation of the domestic currency, especially against the US dollar -4 Sep.1 Dec.1 Mar.14 Jun.14 Sep.14 Dec.14 Mar.15 Jun.15 Sep.15 Dec.15 Mar.1 Jun.1 Sep.1 Dec.1 Mar.17 Increasing excess aggregate demand Source: NIS, NBR

3 Annual inflation path continued to be marked by changes in indirect taxes and fees 1 annual percentage change CPI CPI (constant tax rates) CPI (net of the direct effect of VAT rate changes) pp Change in the annual inflation rate March 17/December 1.5 Economic factors Fading-out of the statistical effect associated with fiscal measures implemented in 1 : VAT rate cut from 4 percent to percent (+1.4 pp) higher excise duty on tobacco (-. pp) - -4 Jan.15 Mar.15 May.15 Jul.15 Sep.15 Source: NIS, NBR estimates Nov.15 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.17 Mar Adoption of new fiscal measures in 17 : VAT rate cut from percent to 19 percent (-. pp) removal of the special excise duty on fuels (-. pp) scrapping of the radio-tv subscription and of the passport fee (-.4 pp)

4 Main commodity prices remained on an uptrend at the beginning of 17 index, 1=1 index, 1=1 1 Trough Trough aggregate commodity price index metals Brent oil FAO food price index meat dairy products cereals edible oils sugar 4 Jan.1 May.1 Sep.1 Jan.11 May.11 Sep.11 Jan.1 May.1 Sep.1 Jan.1 May.1 Sep.1 Jan.14 May.14 Sep.14 Jan.15 May.15 Sep.15 Jan.1 May.1 Sep.1 Jan.17 Source: FAO, IMF Jan.1 May.1 Sep.1 Jan.11 May.11 Sep.11 Jan.1 May.1 Sep.1 Jan.1 May.1 Sep.1 Jan.14 May.14 Sep.14 Jan.15 May.15 Sep.15 Jan.1 May.1 Sep.1 Jan.17

5 The increase in the international oil price caused the annual fuel price inflation to remain in positive territory even after the removal of the special excise duty and the VAT rate cut Crude oil prices Fuel prices on the domestic market 1 9 USD/barrel annual percentage change annual rate (rhs) actual level futures prices* contributions to annual rate, pp annual percentage change special excise duty on fuels VAT USD/RON exchange rate** Brent oil prices** other annual rate (rhs) Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.14 Mar.14 May.14 Jul.14 Sep.14 Nov.14 Jan.15 Mar.15 May.15 Jul.15 Sep.15 Nov.15 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.17 Mar.17 May.17 Jan.15 Feb.15 Mar.15 Apr.15 May.15 Jun.15 Jul.15 Aug.15 Sep.15 Oct.15 Nov.15 Dec.15 Jan.1 Feb.1 Mar.1 Apr.1 May.1 Jun.1 Jul.1 Aug.1 Sep.1 Oct.1 Nov.1 Dec.1 Jan.17 Feb.17 Mar.17 *) Prices recorded on 11 April 17. The April value shows the average of available spot prices. **) Contributions include both contemporaneous and lagged effects. Source: Bloomberg, NIS, NBR calculations and estimates 5

6 A lower supply of vegetables and fruits across Europe amid adverse weather conditions triggered a gradual pick-up in the annual dynamics of VF prices in 17 1 annual percentage change Vegetable and Fruit (VF) Prices percentage change (Mar. vs. Dec.) 1 EU8 RO long-term average (-1) -5-1 Jan.14 Mar.14 May.14 Jul.14 Sep.14 Nov.14 Jan.15 Mar.15 May.15 Jul.15 Sep.15 Nov.15 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.17 Mar.17 EU8 RO Source: NIS, Eurostat, NBR calculations

7 Slight depreciation of the domestic currency in 17 ; relatively stable risk premium evolution Exchange rates Risk premia (CDS spreads, 5 years) 19 index, 1 December 15=1 HUF/EUR PLN/EUR RON/EUR CZK/EUR basis points Romania Hungary Poland Czech Republic Jan.1 Feb.1 Mar.1 Apr.1 May.1 Jun.1 Jul.1 Aug.1 Sep.1 Oct.1 Nov.1 Dec.1 Jan.17 Feb.17 Mar.17 Source: ECB, Reuters Jan.1 Feb.1 Mar.1 Apr.1 May.1 Jun.1 Jul.1 Aug.1 Sep.1 Oct.1 Nov.1 Dec.1 Jan.17 Feb.17 Mar.17

8 L in ea r ( 5-1 ) Signs of a weakening relationship between core inflation and output gap in the last years, % Q 14 Q 14 Q4 15 Source: NIS, NBR estimates output gap annual adjusted CORE, net of the direct effect of the VAT rate changes 15 Q 15 Q 15 Q4 1 1 Q 1 Q 1 Q4 17 Adjusted CORE inflation (s.a. q-o-q percentage change, net of VAT direct effect) Core inflation and output gap (Phillips Curve) regression line (5-1) regression line (14-17) Output gap (% of potential GDP, assessment based on the model for analysis and medium-term forecasting) 8

9 ... also amid a higher relative importance of external factors and strong competition 1% 9% 8% 7% % 5% 4% % % 1% Purchases of consumer goods: domestic production vs. imports domestically-produced goods imports* % ** 1** *) At market value; excluding imports used for manufacturing products under OPT arrangements, recorded under the services account (BPM). **) Actual data on trade and transport margin, customs duties and other taxes on products, necessary to calculate imports at market value, refer to the period until 14 only. For 15-1, the first two items were approximated based on their rates in 1-14, whereas for the third item, different VAT rates were used. Source: Competition Council, NIS, Eurostat, NBR calculations auto motor parts Competitive pressure in sectors relevant to CPI basket (1) alcoholic beverages fixed telephony beer milk edible oil mobile telephony property and compulsory car insurance passenger railway transport natural gas medicines motor fuels clothing, footwear strong competitive pressure cigarettes electricity weak competitive pressure Ox: share in CPI basket (%) Oy: aggregate index of competitive pressure (%)

10 The deterioration of price competitiveness across consumer goods industries facilitated import penetration Real effective exchange rate by main industrial groupings* competition on the external market index, 1=1 manufacturing capital goods intermediate goods consumer goods** consumer goods competition on the domestic market** Real effective exchange rate for consumer goods* competition on the domestic market total food industry light industry furniture industry index, 1= Q 11 Q 11 Q4 1 1 Q 1 Q 1 Q4 1 1 Q 1 Q 1 Q Q 14 Q 14 Q Q 15 Q 15 Q4 1 1 Q 1 Q 1 Q Q 11 Q 11 Q4 1 1 Q 1 Q 1 Q4 1 1 Q 1 Q 1 Q Q 14 Q 14 Q Q 15 Q 15 Q4 1 1 Q 1 Q 1 Q4 9 *) based on producer price indices **) The different REER trajectories for consumer goods are essentially due to the larger shares held by Poland and Hungary in the domestic market (% of Romania s imports) than in Romania s export markets. Note: Increase/decrease appreciation/depreciation. Source: Eurostat, WIOD, national institutes of statistics, NBR calculations 1

11 Stronger excess aggregate demand and economic sentiment in 17 Output gap Economic sentiment indicator* % of potential GDP points, s.a industry services consumers construction trade ESI Q 14 Q 14 Q Q 15 Q 15 Q4 1 1 Q 1 Q 1 Q4 17 Source: Eurostat, NIS, EC-DG ECFIN, NBR calculations and estimates Q 8 8 Q 9 9 Q 1 1 Q Q 1 1 Q 1 1 Q Q Q 1 1 Q 17 *) deviation from the historical average ( Q 17 )

12 in line with labour market developments Number of employees in the economy Average net wage 5 4 contributions, pp budgetary sector agriculture trade total (rhs) annual percentage change industry construction market services 5 4,,5 lei, s.a. annual percentage change level private sector level budgetary sector change private sector (rhs) change budgetary sector (rhs), 4 1, , Q 14 Q 14 Q Q 15 Q 15 Q4 1 1 Q 1 Q 1 Q4 17 * Q 14 Q 14 Q Q 15 Q 15 Q4 1 1 Q 1 Q 1 Q4 17 *) Jan.-Feb. Source: NIS, NBR calculations 1

13 Consumers optimism returned to the pre-crisis level, bolstering the fast dynamics of retail purchases Final household consumption Consumer confidence annual percentage change annual percentage change final household consumption retail excl. auto (rhs) auto trade (rhs) 5 5 savings unemployment economic context financial standing confidence indicator points*, s.a Q 14 Q 14 Q Q 15 Q 15 Q4 1 1 Q 1 Q 1 Q Q 8 8 Q 9 9 Q 1 1 Q Q 1 1 Q 1 1 Q Q Q 1 1 Q 17 Source: NIS, EC-DG ECFIN, NBR calculations *) deviation from the historical average,

14 Lending to households stays robust contributions, pp housing loans consumer loans total (rhs) annual perchange change, stock Loans to households 1 9 housing loans* consumer loans* lei bn, 1-month flow Interest rate on leu-denominated loans to households %, p.a., flow 1 9 housing loans consumer loans M ROBOR Q 14 Q 14 Q Q 15 Q 15 Q4 1 1 Q 1 Q 1 Q Nov.15 Dec.15 Jan.1 Feb.1 Mar.1 Apr.1 May.1 Jun.1 Jul.1 Aug.1 Sep.1 Oct.1 Nov.1 Dec.1 Jan.17 Feb.17 Mar Q 14 Q 14 Q Q 15 Q 15 Q4 1 1 Q 1 Q 1 Q4 17 Source: NBR *) excl. renegotiated loans

15 Negative developments in investments in Q4, especially on segments with a large impact on the economy s growth potential infrastructure and technology annual percentage change 15 1 =1, 4-quarter moving average, s.a. points -7 building permits 4 15 households' expectations on investment in building/purchasing a dwelling (rhs) gross fixed capital formation equipment civil engineering works buildings Q 15 Q 15 Q4 1 1 Q 1 Q 1 Q Q Q Q 1 1 Q 17 Source: NIS, NIS/DG ECFIN survey 15

16 Long-term expectations on inflation remain anchored to the target Expectations of economic agents* Expectations of financial analysts 15 1 balance of answers (%), M moving average, s.a. trade services consumers inflation rate 1 year ahead inflation rate years ahead annual percentage change 5 Inflation target Jan.15 Feb.15 Mar.15 Apr.15 May.15 Jun.15 Jul.15 Aug.15 Sep.15 Oct.15 Nov.15 Dec.15 Jan.1 Feb.1 Mar.1 Apr.1 May.1 Jun.1 Jul.1 Aug.1 Sep.1 Oct.1 Nov.1 Dec.1 Jan.17 Feb.17 Mar.17 Apr.17 Source: EC-DG ECFIN survey, NBR survey among financial analysts Jan.15 Feb.15 Mar.15 Apr.15 May.15 Jun.15 Jul.15 Aug.15 Sep.15 Oct.15 Nov.15 Dec.15 Jan.1 Feb.1 Mar.1 Apr.1 May.1 Jun.1 Jul.1 Aug.1 Sep.1 Oct.1 Nov.1 Dec.1 Jan.17 Feb.17 Mar.17 Apr.17 *) -month horizon for trade and services companies and 1-month horizon for consumers; values inside the ±5 percent variation band indicating price stability

17 Annual CPI inflation forecast The annual CPI inflation rate is seen on an upward path: Forecasted values: 1. percent at end-17 (-.1 pp).1 percent at end-18 (-. pp).4 percent in 19 (projection horizon) The annual CPI inflation rate is anticipated to re-enter the variation band of the target in 17 Q4 At end-17, inflation is projected at: 1.9 percent, net of the direct effects of the VAT rate cut. percent, when calculated at constant tax rates 15 uncertainty interval annual CPI inflation rate (previous round) annual CPI inflation rate mid-point of the annual target (.5 percent as of 1) variation band of the target annual CPI inflation rate, net of the VAT first-round effect 1 17 Note: 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 with the time horizon they refer to. Source: NIS, NBR calculations and projections annual percentage change Inflation target:.5% ±1pp 17

18 Components contribution to the annual inflation forecast Dec. year T/Dec. year T-1 4 percentage points.1% 1.% tobacco products and alcohol..1 fuels -..1 VFE.4. administered prices..4 adjusted CORE 1.. CPI inflation 1..1 Note: The values in the table have been rounded off to one decimal place. Source: NBR projections 18

19 External assumptions underlying the projection During the forecast interval, annual growth of external demand* is projected to consolidate close to percent The ECB s monetary policy stance remains persistently accommodative; the average annual HICP inflation rate in the euro area is seen to stay below the percent benchmark Oil prices are lower than in the previous Inflation Report, reflecting the persistent surplus given the resilience of unconventional oil production percent February 17 IR May 17 IR USD/barrel Effective EU growth* Euro area annual inflation M EURIBOR Brent oil price (rhs) -14 *) external demand is proxied by the effective EU GDP indicator, which is calculated based on the breakdown of Romania s exports by EU Member State Source: NBR assumptions based on data provided by the European Commission, Consensus Economics and Bloomberg (futures prices) 19

20 Inflationary pressures beyond the scope of monetary policy The trajectory of volatile food prices: Significantly revised upwards in 17 amid a lower production of vegetables and fruits across Europe Based on the assumption of a normal agricultural year domestically Fuel price dynamics: Downward revision (annual dynamics of the international oil price alongside a stronger euro against the US dollar) Negative annual dynamics in 17 Q4 only (base effect from the previous year) Administered price dynamics: Values similar to those previously projected Volatile food prices annual inflation 1 Source: NIS, NBR projections Fuel price annual inflation 1 17 end of period, % May 17 IR February 17 IR end of period, % May 17 IR February 17 IR

21 Revision of the output gap projection compared to the previous forecasting round Output gap Factors Real GDP growth in 1 Q4, higher than anticipated in the previous forecasting round Revision impact on output gap* Fiscal and income policy stances External demand Real broad monetary conditions: adequate for ensuring price stability over the medium term, contributing to achieving sustainable economic growth *) The upward arrows show more stimulative or less restrictive influences on the output gap than in the previous forecasting round 15 May 17 IR February 17 IR 1 17 Source: NBR estimates and projections % of potential GDP

22 Annual adjusted CORE inflation projection determinants Upward path as a result of: The gradual build-up of inflationary pressures stemming from fundamental factors: Increase in excess demand, prompted by the expansionary fiscal policy stance and the higher disposable income Uptrend of inflation expectations *, under the impact of these factors Developments in import prices will reflect a slow pace of increase of external prices (below percent) Fading-out in January 18 of first-round statistical effects of the standard VAT rate cut implemented in January 17 Contributions to annual adjusted CORE inflation (pp) *) 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 VAT import prices (consumer goods) output gap inflation expectations annual adjusted CORE inflation rate, net of the VAT first-round effect (%) annual adjusted CORE inflation rate (%)

23 Annual adjusted CORE inflation projection compared to the previous forecasting round The annual adjusted CORE inflation rate was revised downwards for the entire forecast interval in the context of a weaker pass-through of inflationary pressures from domestic aggregate demand into core inflation Annual adjusted CORE inflation May 17 IR (net of the VAT first-round effect) February 17 IR May 17 IR end of period, % Source: NIS, NBR projections

24 Potential causes for inflation to deviate from the projected path Causes Balance of risks to the inflation path is assessed to be tilted to the upside External coordinates: volatility of capital flows to emerging economies, given the forecast of further diverging monetary policy stances of the world s major central banks (also owing to the potential fiscal stimulus in the US) and amid the electoral calendar in some EU countries (parliamentary elections in France and Germany) In equilibrium uncertainty relative to Brexit talks and ensuing effects the prospects for economic growth and inflation in the euro area/eu and in emerging economies (especially China) Uncertainty about fiscal and income policies: fiscal and income policy stances, also in the context of recent legislative initiatives relative to wage and fiscal measures Global commodity prices (energy) Administered price dynamics, conditional upon available information: uncertainties surrounding the magnitude of hikes in natural gas and electricity prices Tilted to the upside Tilted to the downside In equilibrium 4

25 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 cut the minimum reserve requirement ratio on foreign currency-denominated liabilities of credit institutions to 8 percent from 1 percent starting with the 4 May June 17 maintenance period. The minimum reserve requirement ratio on leu-denominated liabilities remains unchanged at 8 percent. *) meeting of 5 May 17 5

26 Calendar of monetary policy meetings of the NBR Board July 17 4 August 17 * October 17 7 November 17 * 8 January 18 7 February 18 * *) review and approval of the quarterly Inflation Report

27 At the end of the press conference, the following will be available on the NBR website ( Inflation Report May 17, full version (in Romanian) Summary of the Inflation Report May 17 (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 7

Press Conference. Inflation Report. August Mugur Isărescu. Governor

Press Conference. Inflation Report. August Mugur Isărescu. Governor Press Conference Inflation Report August 217 Mugur Isărescu Governor Bucharest, 8 August 217 1 The annual CPI inflation rate accelerated in 217 2 annual change, % Inflation target: 2.5% ±1pp Determinants