Romania Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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Romania's annual CPI inflation was 3.3% in December 2018, flat versus 2017 and staying within the +/- 1 percentage point variation band of the 2.5% flat target. This was against the backdrop of faster price increases in the first part of last year amid statistical base effects, exogenous supply-side factors and wage rises moderated towards year-end.

In response, the Banca Naţională a României's (BNR) gradually adjusted its monetary policy with three hikes of the key rate, to an annual 2.5%, and tighter liquidity management – an appropriate dosage given the significant uncertainties surrounding the inflation outlook.

Nevertheless, higher-than-expected increases in some food and fuel prices, linked to global trends, along with demand-pull and wage cost-push pressures and the impact of some end-2018 tax legislation led to an upswing in the CPI towards 4% in first part of 2019.

Annual inflation is set to hover above the variation band for a while, with its future path hinging on risks and uncertainties associated with the stance of fiscal and income policies as well as the wider current account deficit (CAD), which poses concerns. Relevant factors for the inflation outlook also relate to uncertainties surrounding the euro area and global growth – amid the trade war and Brexit, international oil price trends, the prospective easing of the ECB's and US Federal Reserve's monetary policies, and the conduct of central banks in the region.

In 2018 economic activity in Romania was robust, although consumption-driven, with annual GDP growth at 4.1% after a hefty 7% advance in 2017. However, pressures are building as external imbalances picked up amid persistent excess demand, pro-cyclical fiscal policies and labour market tensions. Lower investment also places Romania among the laggards in the region in terms of capital accumulation.

The potential widening of the CAD towards 5% of GDP this year from 3.4% in 2017, points to Romania's vulnerable position in the region, especially as financing through volatile capital grew. The budget deficit again came just under 3% of GDP but the structural reading hovered well above the 1% medium-term objective. Public debt reached almost 35% of GDP in 2018, while international reserves (foreign currencies and gold) stood at €3.67 billion at the end of June 2019.

Financial stability is robust, with good prudential indicators and no severe systemic risk, while non-performing loans dropped to 4.75% at the end of April 2019 from a 2014 peak of 20.7%.

Confidence however was hurt by fresh legislative measures at the end of 2018, which included a new benchmark index for loans to consumers (IRCC) that adversely impacted lending. Private sector credit has decelerated to reflect a slowdown in household loans.

On the brighter side, leu-denominated loans now account 66.2% of total private sector credit compared to one third before the crisis, indicating better resilience to contagion risk and improved monetary transmission. However, Romania's financial intermediation, below 30%, remains a challenge amid sluggish corporate lending. This reflects not only the structural problems faced by firms but also issues related to the banking sector's partnership culture.

Going forward, safeguarding price and financial stability and achieving sustainable growth require an adequate policy mix to pave the way for a much-needed advance in competitiveness, which will secure progress in convergence with the EU and euro adoption.