Press Conference Inflation Report November 5 Mugur Isărescu Governor Bucharest, 9 November 5
Dec. The annual inflation rate remained below the variation band of the target in 5 Mar. Jun. Sep. Dec. Mar. Jun. Sep. Dec. Mar.5 Jun.5 Sep.5 8 annual percentage change Inflation target:.5% pp Determinants of inflation Broadening the scope of the 9 percent reduced VAT rate to all food items, non-alcoholic beverages and public food services as of June 5 (the negative contribution to the annual inflation will persist until May ) Sharp decline in crude oil prices - - CPI CPI (net of the VAT first-round effect) Subdued inflation expectations New energy market deregulation stage Shrinking negative output gap Source: NIS, NBR calculations
Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Feb.5 Mar.5 May.5 Jun.5 Aug.5 Sep.5 The negative annual inflation rate (induced by the cut in the VAT rate on food items) accelerated slightly in, on account of fuel price movements,... contributions to the annual inflation rate, pp annual percentage change - - - - VAT fuels VFE (net of the VAT first-round effect) administered prices tobacco products and alcohol adjusted CORE (net of the VAT first-round effect) CPI (rhs) CPI (net of the VAT first-round effect), rhs - - - - Source: NIS, NBR calculations
Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Feb.5 Mar.5 May.5 Jun.5 Aug.5 Sep.5 Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Feb.5 Mar.5 May.5 Jun.5 Aug.5 Sep.5 in the context of the decline in crude oil prices to a new post-crisis low annual percentage change domestic fuel price Brent oil price (rhs) annual percentage change - - - - 8 annual percentage change contributions to the annual inflation rate, pp. direct effect on CPI (rhs) indirect effect on CPI (rhs) CPI.5. - -.5 Source: NIS, Bloomberg, NBR estimates
Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Feb.5 Mar.5 May.5 Jun.5 Aug.5 Sep.5 Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Feb.5 Mar.5 May.5 Jun.5 Aug.5 Sep.5 Relatively stable exchange rate of the leu versus the euro in 5 Exchange rate Risk premia (CDS spreads, 5 years) index, January = EUR/RON EUR/PLN RO basis points PL EUR/CZK EUR/HUF CZ HU 5 8 5 9 5 9 Source: ECB, Reuters 5
Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Oct.5 Jan. Apr. The prices of main agri-food commodities remained at low levels, due to the plentiful global supply 5 EUR/tonne 5 Paris Bourse Wheat prices Futures prices Yields of main grain crops tonnes/hectare 9 5 5 ρ =.8 Local market* 5** 5-year average 5** 8 7 5 5 5 EUR/tonne Paris Bourse Maize prices Futures prices 5 5 ρ =.9 Local market* global EU RO global EU RO Wheat Maize *) prices on representative markets in Muntenia Source: Bloomberg, Ministry of Agriculture and Rural Development **) estimates Source: MARS and USDA Reports, October 5
Jan. Mar. May. Jul. Sep. Nov. Mar.5 May.5 Sep.5 Acceleration in administered price dynamics, amid the ongoing energy market deregulation Administered prices annual percentage change contributions, pp monthly percentage change Energy Hike in the natural gas price (up. 5 percent), due also to the rise in regulated prices Marginal increase in the electricity price, the effect of the new market opening stage being almost entirely offset by the lower contribution to high efficiency cogeneration Medicines - - Drop in prices of government subsidised medicines, in the context of enforcing natural gas electricity medicines the legislation imposing medicine prices lower than or at most equal to those charged in the EU countries that were other administered prices total (rhs) used to make a comparison Source: NIS, NBR calculations 7
Jan. Apr. Jul. Oct. Oct.5 Shrinking negative output gap, due to the improved economic sentiment Output gap Economic sentiment indicator Domestic absorption % of potential GDP Projection 7 points 5 annual percentage change gross fixed capital formation households final consumption 5-98 - 95-5 Romania - 9 Euro area - - Q 5 Q Q 7 Q 89-5 5 Q Q Q Q Q Q Q Q Source: NIS, EC-DG ECFIN survey, NBR estimates and projections 8
The recovery of investment appetite is reflected by the positive developments in construction and the rise in equipment demand Investment loans Construction works Capital goods 5 stock, annual percentage change equipment loans real estate loans 5 annual change quarter moving average, %, s.a. non-residential buildings engineering works residential buildings volume index, = 9 5 imports tractors and other machinery 8 imports auto (transp. of goods) 5 Q Q Q Q Q Q Q Q * -5-5 Q Q Q Q Q Q Q Q * imports auto (transp. of > pers.) imports capital goods (excl. the auto industry) exports of capital goods (excl. the auto industry) 5** *) July-August **)based on 7-month data (imports) and 8-month data (domestic market sales) Source: NIS, Eurostat, NBR calculations 9
Accelerated absorption of labour force; fast wage dynamics, but no comparable productivity gains 9 Number of employees index, =, s.a. private sector Gross wage earnings index, =, s.a. nominal wage, private sector nominal wage, public sector real wage, private sector real wage, public sector Wages and productivity in industry annual percentage change 9 public sector 8 97 nominal gross wage - 9 I II III IV I II III IV I II III* 5 *) July-August Source: NIS, NBR calculations 9 I II III IV I II III IV I II III 5 labour productivity I II III IV I II III IV I II III* 5 -
Swift increase in consumer demand in 5, amid the improvement in households financial standing Purchases of goods and services Leu-denominated consumer loans Consumer confidence** 9 real annual percentage change market services to households retail trade automotive trade 9. 7.5 lei bn. new loans %, p.a. interest rate (rhs) points. 8 8.5. savings - - I II III IV I II III*.5. I II III IV I II III unemployment economic context financial standing confidence indicator I II III IV I II III Oct. - -8 5 5 5 *) July-August for automotive trade and services **) deviation from the historical average (May Oct. 5) Source: NIS, EC-DG ECFIN survey, NBR
Sep. Oct. Nov. Dec. Feb.5 Mar.5 May.5 Jun.5 Aug.5 Sep.5 Sep. Oct. Nov. Dec. Feb.5 Mar.5 May.5 Jun.5 Aug.5 Sep.5 Long-term inflation expectations stay close to the mid-point of inflation target Expectations of economic agents* Expectations of financial analysts balance of answers (%), M ahead, s.a. manufacturing trade services inflation rate year ahead inflation rate years ahead % 5 consumers (M ahead ) Inflation target:.5 pp - - - *) The annual inflation staying inside the variation band ( 5 percent) indicates the relative price stability over the expectation horizon. Source: EC-DG ECFIN survey, NBR survey among financial analysts
Annual CPI inflation forecast The month CPI inflation rate is projected to stand at -.7 percent at end-5 and at. percent at end-,. percentage points lower and higher respectively than the levels in the previous Inflation Report. Excluding the first-round effect of the VAT rate cuts, the inflation rate is forecasted to reach. percent at end-5 and.7 percent at end- uncertainty interval annual CPI inflation rate (previous round) annual CPI inflation rate mid-point of the annual target (.5 percent as of ) variation band annual CPI inflation rate (net of the VAT first-round effect) annual percentage change Inflation target:.5% pp 9 The baseline scenario incorporates the provisions of the new Tax Code, as subsequently amended and supplemented by Government Emergency Ordinance No. 5 of 7//5 on regulating some fiscal measures - The annual CPI rate is expected to stay negative until May, revert to positive values, yet beneath the lower bound of the variation band of the target until the end of, before returning inside the band starting 7 5 Note: The uncertainty interval is calculated based on the forecast errors of the annual CPI inflation rate in the NBR projections during 5-. The magnitude of forecast errors is positively correlated with the time horizon they refer to. Source: NIS, NBR calculations and projections - 7
Components contribution to the annual inflation forecast Dec. year T/Dec. year T percentage points -.7%.% - - - 5 tobacco products and alcohol.. fuels -. -. VFE.. administered prices.. adjusted CORE -..8 CPI inflation -.7. Note: The values in the table have been rounded off to one decimal place. Source: NIS, NBR projections
External assumptions underlying the projection The scenario for developments in the effective EU GDP* foresees a gradual recovery of external demand, also amid the ECB s monetary policy measures (the expanded asset purchase programme) The annual HICP inflation rate is seen remaining below the percent benchmark, rising progressively until the projection horizon The nominal M EURIBOR is projected to stick to low levels, reflecting the persistently accommodative ECB monetary policy stance.5..5 percent..75.9.9..7 August 5 IR November 5 IR USD/barrel 59.. 5. 5. 7 5. 8.5. -.5.7... -. -. 5 5 5 5 - Effective EU economic growth* Average annual euro area inflation M EURIBOR Brent oil price (rhs) * 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 European Commission data, Consensus Economics and Bloomberg (futures prices) 5
Exogenous pressures on inflation Dynamics of administered prices: Administered prices annual inflation Incorporate the latest information provided by the relevant authorities Revised marginally downwards in the course of, as a result of incorporating the effect from broadening the scope of the reduced VAT rate to potable water delivery services, only partly offset by the effect of reassessing the assumption on natural gas price dynamics and the changed impact of the cut in the standard VAT rate according to the final version of the Tax Code The trajectory of volatile food prices is marked by: 5 end of period, % August 5 IR November 5 IR Volatile food prices annual inflation 7 end of period, % 8 - The atypical declines in vegetable prices in July and August 5 5 Unfavourable base effects in the context of the bumper crop and the assumption of a less favourable crop in 5 August 5 IR November 5 IR -5 The fading out, in June, of the first round effect of broadening the scope of the reduced VAT rate on food items 5 7 - Category specific seasonal effects Source: NIS, NBR projections
Revision of the output gap projection compared to the previous round Factors Upwards/downwards* 5 7 November 5 IR Output gap % of potential GDP Fiscal policy stance August 5 IR Revision by the NIS of the historical series of the seasonally-adjusted real GDP and the slower than anticipated GDP dynamics in 5 Q Real broad monetary conditions: adequate for ensuring price stability over the medium term, also contributing to paving the way for the recovery of lending and sustainable economic growth External demand, whose influence has been revised to less restrictive values *) The upward arrows show less restrictive or more stimulative influences on the output gap than in the previous forecasting round. 5 Source: NBR projections and estimates 7 - - - - 7
Determinants of annual adjusted CORE inflation projection Trajectory marked by the transitory first and second round effects of the successive VAT rate cuts Net of the aforementioned first-round effects, the annual core inflation rate is seen remaining positive and picking up in the latter part of the forecast interval, under the impact of: Inflation expectations*, rising gradually as the effects of the said fiscal measures fade away The output gap, reflecting the emergence of inflationary pressures in the course of, due to: the expansionary fiscal policy stance compounded by the pay rises which are foreseen to outpace productivity gains economy-wide the stimulative influence of real monetary conditions Slightly more pronounced inflationary pressures from import prices, especially amid the foreseen pick up in the dynamics of external prices *) backward and forward looking Contributions to annual adjusted CORE inflation (pp) VAT import prices output gap inflation expectations Note: The annual adjusted CORE inflation is calculated as a quarterly average, in line with its econometrically modelled determinants. Source: NBR calculations 5 7 annual adjusted CORE inflation rate net of the VAT first-round effect (%) annual adjusted CORE inflation rate (%) 8 - - - - -5 -
Annual adjusted CORE inflation projection compared to the previous round The projected path of the annual adjusted CORE inflation rate has been revised: Slightly downwards for end-5 compared to the previous round, on account of lower-than-previouslyanticipated levels in 5 Upwards for end-, due mainly to the smaller cut in the standard VAT rate and faster growth of aggregate demand. The latter s impact is anticipated to strengthen in the course of 7 November 5 IR (net of the VAT first-round effect) November 5 IR August 5 IR Annual adjusted CORE inflation Source: NIS, NBR projections 5 end of period, % 7 9 - - - - -5
Potential causes for inflation to deviate from the projected path Causes External coordinates: growth outlook for the euro area and major emerging economies, China in particular volatility of capital flows to emerging economies, given the global geopolitical tensions, the adjustment in the monetary policy stances of the world s major central banks, and Greece s sovereign debt sustainability The implementation of economic policies in the period ahead and the outlook for the relations with international institutions, in the context of the uncertainty surrounding the appointment of a new cabinet and hence the future fiscal and income policy stances (the drafting of the budget is still pending) Global commodity prices (oil, natural gas) Agri food prices (weather conditions), particularly of vegetables and fruits Dynamics of administered prices (assessments conditional upon possible reconfigurations of information supplied by the relevant Romanian authorities) Balance of risks Balanced, surrounded by high uncertainty Tilted to the upside Tilted to the downside over the short term Tilted to the upside over the short term Balanced
Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Feb.5 Mar.5 May.5 Jun.5 Aug.5 Sep.5 Oct.5 Interbank rates are at historical lows,... 9 8 7 5 percent monetary policy rate (end of period) interest rate on interbank transactions (period average) M ROBOR (period average) deposit facility rate (end of period) lending facility rate (end of period)
Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Oct.5 Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Oct.5 Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Oct.5 Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Oct.5... similarly to other countries in the region Romania percent 8 M ROBOR ON Poland percent M WIBOR ON (POLAND) 8 Hungary percent 8 M BUBOR ON (HUFONIA) Czech Republic percent ON (CZEONIA) M PRIBOR 8 monetary policy rate deposit facility rate lending facility rate Source: Bloomberg, NBR, national central banks
Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Feb.5 Mar.5 May.5 Jun.5 Aug.5 Sep.5 Oct.5 M ROBOR rates are at historical lows, close to the levels seen on other markets in the region 9 8 average values of period,% M EURIBOR M PRIBOR M BUBOR M ROBOR M WIBOR 7 5 - Source: Bloomberg, NBR, national central banks
Decisions of the NBR Board* To keep unchanged the monetary policy rate at.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 currencydenominated liabilities of credit institutions *) meeting of 5 November 5
Calendar of NBR Board meetings on monetary policy issues 7 January 5 February * *) review and approval of the quarterly Inflation Report 5
At the end of the press conference, the following will be available on the NBR website (www.bnr.ro): Inflation Report November 5, full version (in Romanian) Summary of the Inflation Report November 5 (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 www.youtube.com/bnrro)