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BNR: Economic growth in 2017, at the highest post-crisis pace

Board members of National Bank of Romania (BNR) note that the economic expansion had confirmed the expectations of a slowdown in 2017 Q4 – after having accelerated for four consecutive quarters, according to the minutes of the monetary policy meeting.

Its annual dynamics remains, however, robust at 6.9 percent, in the context of the exceptionally high level of 8.8 percent in the previous quarter, which was a post-crisis peak, bankers say.

”It was remarked that, in 2017 as a whole, economic growth had recorded the fastest post-crisis pace, its significant acceleration being, however, accompanied by the notable expansion of the current account and structural deficits,” the document reads.

Looking at the recent inflation developments, Board members observed that the annual inflation rate had stood at 3.32 percent at end-2017, i.e. inside the ± 1 percentage point variation band of the 2.5 percent target. It had increased to 4.32 percent in January and 4.72 percent in February, significantly above the upper bound of the band, but slightly below the forecast.

”It was shown that behind the upward path had stood mainly supply-side factors and mention was made of the contributions from the base effects associated with cutting/scrapping of indirect taxes and non-tax fees and charges implemented in the same year-earlier period as well as from the recent hikes in the prices of electricity, natural gas and heating and the costlier fuels amid higher oil prices,” the minutes also shows.

Turning to labour market developments, Board members observed that the number of employees in the economy, while having continued to increase to a new post-crisis high in the first month of 2018, had posted a further slowdown in its annual dynamics. In turn, the ILO unemployment rate had remained stuck in January at the 4.6 percent historical low touched in December 2017 after the fall seen in 2017 Q4, concurrently, however, with a drop in the job vacancy rate for the second straight quarter.

Following the discussions on financial market developments, BNR Board members considered that, in 2018 Q1, monetary conditions had continued to be less accommodative. They underlined the slight increase in the average relevant money market rates compared to the previous three months, as well as the relative stability of the leu exchange rate in the second part of the interval, in the context of external influences together with the higher interest rate differential versus the prevailing levels in the EU and across the region.

Central bank officials also remarked the slightly larger spread between interest rates on new loans and those on new time deposits, partially reflecting a slower pass-through to the latter of the policy rate increase, probably also owing to the substantial liquidity surplus on the money market which was, however, largely transitory.

Board members then discussed the possible implications on the inflation outlook exerted by the new assessments on economic growth over the short time horizon. It was remarked that those assessments anticipated a further slowdown in economic expansion in the first half of 2018, which masked however a renewed step-up in its quarterly dynamics in Q1 followed by a marginal decline in Q2. In the members’ view, such an outlook, somewhat similar to the latest medium-term forecast, rendered likely a slight widening of the positive output gap in 2018 H1.

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