bucharest nov 19 reuters  following is the full text of the minutes from the romanian central bank board ratesetting meeting on nov 9 as released by the bank on friday the national bank of romania board members present at the meeting mugur isărescu chairman of the board and governor of the national bank of romania florin georgescu vice chairman of the board and first deputy governor of the national bank of romania leonardo badea board member and deputy governor of the national bank of romania eugen nicolăescu board member and deputy governor of the national bank of romania csaba bálint board member gheorghe gherghina board member cristian popa board member danradu rușanu board member virgiliujorj stoenescu board member during the meeting the board discussed and adopted the monetary policy decisions based on the data on and analyses of recent macroeconomic developments and the mediumterm outlook submitted by the specialised departments as well as on other available domestic and external information looking at the recent developments in consumer prices board members noted that the annual inflation rate had risen again above the upper bound of the variation band of the target in september 2021 climbing to 629 percent ie significantly above the forecast from 525 percent in august and 394 percent in june it was remarked that its faster increase during q3 had been triggered especially by exogenous cpi components the same as in the first half of the year and that the main contributor had been that time round the significant hike in natural gas and electricity prices in july alongside influences from the further rise in fuel prices and the notable pickup in vegetable prices in september due only to certain goods though at the same time the annual adjusted core2 inflation rate had followed a higherthanexpected upward path in q3 to reach 36 percent in september from 29 percent in june however nearly half of the advance had owed to almost acrosstheboard increases in the processed food segment primarily under the impact of marked hikes in international commodity prices as well as higher energy and transport costs the increase being also attributed to a significant extent to costlier compulsory motor thirdparty liability insurance policies in september board members pointed out at the same time the contributions made by other categories of services and nonfood items had been relatively modest although their scope had expanded slightly probably in line with the broadbased growth in operating costs of economic agents inter alia in the context of the pandemic as well as with the marginal increase in the annual depreciation of the leu against the euro in q3 following the analysis board members agreed that the recent stepup in annual core inflation was ascribable to adverse supplyside shocks particularly to external ones whose direct and indirect effects had been fuelled domestically by the stronger demand for goods and services after the easing of mobility restrictions and by the upward movement of shortterm inflation expectations members underlined the sharp rises posted over the recent months by industrial producer prices at global and european level as well as domestically – under the impact of the surge in the prices of energy other commodities and transport but also as a result of the semiconductor crisis and other persistent bottlenecks in production and supply chains those rises were seen likely to affect over a certain time horizon the prices of almost all consumer goods and services also via imports mention was also made of the significant upward adjustments in economic agents’ shortterm inflation expectations accompanied only by a slight increase in longerterm ones as well as of the still robust annual dynamics of real disposable income albeit on a considerable decline inter alia due to a sharp slowdown in the annual growth of the average net real wage as for the cyclical position of the economy board members noted that the second preliminary version of statistical data indicated a more moderate slowing of economic growth in q2 than previously estimated ie to 19 percent the evolution implied that gdp had exceeded more obviously its prepandemic level during that period and that excess aggregate demand had stood slightly higher than the august forecast at the same time reference was made to a more pronounced increase in the annual gdp growth rate in q2 amid the base effect associated with its large decline in the same yearearlier period – to 139 percent from 02 percent in q1 the stepup had been supported by all major components of aggregate demand but with considerably different contributions and to slightly modified extents compared to previous estimates thus household consumption had made almost the prevailing contribution followed closely by the change in inventories whereas gross fixed capital formation and general government consumption had both had modest contributions with the latter in light of the new data series furthermore the decrease in the negative contribution of net exports to annual gdp dynamics in q2 albeit somewhat lower than previously estimated had been reconfirmed given that the particularly sharp increase in the annual change in exports of goods and services had outpaced that in imports thereof the trade deficit had recorded however a faster widening versus the same yearearlier period while the annual dynamics of the current account deficit had slowed down considerably versus q1 under the impact of a relative improvement in income balances remaining nevertheless above the average values recorded in 2019 and 2020 turning to nearterm prospects board members shared the view that gdp growth excluding agriculture would probably see a more pronounced slowing in the second half of 2021 compared to prior forecasts which would likely cause excess aggregate demand to narrow during that period contrary to the slight advance anticipated in august the economy as a whole was expected however to see a renewed marginal acceleration in growth in q3 due to the very good performance of agriculture while its annual dynamics were anticipated to post a relatively more moderate deceleration remaining thus particularly high from a historical perspective it was observed that according to recent developments in highfrequency indicators the annual gdp growth in q3 was probably supported by domestic demand alone – more notably by private consumption and to a lower extent by gross fixed capital formation – while the negative contribution of net exports could increase as exports of goods and services had seen in julyaugust a much larger contraction in their annual rate of change than imports against that background the trade deficit had recorded a significantly faster deepening in annual terms whereas the current account deficit had continued to widen exceeding january through august 2021 overall by more than 55 percent the level seen in the same yearearlier period board members viewed those trends as particularly worrisome inter alia amid a progressive drop in the coverage of the current account deficit by foreign direct investment and capital transfers board members showed that labour market developments had been further relatively favourable in the first two months of q3 yet amid rising supply issues and higher energy prices as well as increased uncertainties about the epidemiological situation thus the number of employees economywide had risen at a more moderate monthly pace than in the first part of the year exceeding slightly the prepandemic level but staying below the historical peak reached in december 2019 at the same time after the gradual decline in h1 the ilo unemployment rate had recorded small increases in july and august and had gone down again in september to the june level of 50 percent thus remaining visibly above the values before the pandemic when labour market had however witnessed an elevated degree of tightness several board members underlined mention was also made of the relatively flat job vacancy rate in 2021 h1 reflecting a somewhat low capacity of the economy to create jobs probably inter alia amid the progress in digitalisation and automation the deceleration in the annual growth of wage earnings in julyaugust against the q2 average was however attributable to the base effects associated with last year’s specific developments marked inter alia by the recourse to government’s labour retention schemes some board members remarked furthermore it was observed that an increased number of business sectors had indicated a shortage of skilledunskilled workforce also in the context of emigration and the skill mismatch that would likely generate pressures on wages especially amid the upward movement in the inflation rate aside from those stemming from the hike in the economywide gross minimum wage at the beginning of 2022 board members shared the view that in the short run high uncertainties would continue to surround labour market developments given the current public health crisis and the insufficient immunisation coverage alongside the recent tightening of mobility restrictions but also in the context of growing bottlenecks in global supply chains likely to cause delays or even halts in production in certain industries nevertheless the entailing risks were mitigated by the reactivation of government’s job retention schemes as well as by the lower severity of the current restrictive measures several board members deemed citing also the relative resilience of hiring intentions for q4 reflected in the latest surveys over a somewhat longer horizon however uncertainties persisted over the ability of some businesses to remain viable after the cessation of government support measures especially in the context of a steep pickup in prices for energy transport and other commodities and goods as well as amid supply chain bottlenecks and the need for technology integration possibly leading to restructuring or windingup the implications of a likely expansion of automation and digitalisation domestically as well as of a possibly higher resort by employers to workers from abroad remained also particularly relevant for future labour market conditions turning to financial market conditions board members highlighted the significant upward adjustments in key interbank money market rates during october to 17month highs under the influence of the policy rate hike as well as amid the tightening of liquidity conditions and the expectations on the further increase in the reference rate probably also fostered by developments in the region in turn yields on government securities had followed a considerably steeper upward path across the entire maturity spectrum inter alia in the context of the persistence of domestic political tensions and the uptrend in longterm government bond yields in developed economies and regionally it was observed that against that background as well as amid the abatement of volatility on the international financial market the eurron exchange rate had remained relatively stable at the higher readings reached in midseptember even in the context of the renewed policy rate hikes recently carried out by central banks in the region board members agreed that risks to the leu’s exchange rate remained however elevated with potential adverse implications for inflation and external vulnerability indicators in light of the uncertainties surrounding budget consolidation fuelled by the political crisis and of the external imbalance widening trend board members pointed out the further climb in the twodigit range posted by the growth rate of credit to the private sector in september due to the intense lending in local currency supported inter alia by government programmes particularly “imm invest romania” reference was made to the visibly larger volume of new leudenominated loans to nonfinancial corporations but especially to the historical high reached by new housing loans in domestic currency alongside the further high from a historical perspective albeit declining flow of leudenominated consumer credit hence the stock of the domestic currency component had seen its pace of increase accelerate to 184 percent in september its share in total private sector credit widening to 716 percent as for future macroeconomic developments board members observed that in the current context the anticipated inflation pattern was again revised considerably upwards especially prominent over the short term specifically the annual inflation rate was expected to remain on a steep uptrend until towards mid2022 – climbing to 75 percent in december 2021 and to 86 percent in june 2022 way above the previouslyforecasted values of 56 percent and 42 percent respectively however it would then witness a relatively swift downward adjustment falling to 59 percent in december 2022 and returning in 2023 q3 inside the variation band of the target at 33 percent marginally below the august projection the renewed considerable worsening of the inflation outlook was entirely attributable to adverse supplyside shocks particularly external ones board members repeatedly underlined their inflationary impact was likely to amplify considerably and to protract the positive deviation of the annual inflation rate from the upper bound of the band while generating significant disinflationary base effects subsequently in addition to those stemming from the successive increases in energy and food prices during the first three quarters of 2021 it was shown that the current upward revision was mainly caused by the new large hikes anticipated for natural gas and electricity prices in 2021 q4 and 2022 q1 amid the surge in wholesale prices domestically as well as in europe and globally additional albeit more modest influences were also expected from the other exogenous cpi components – prices of fuels and tobacco products administered prices and vfe prices – but also from the rise in other commodity prices particularly for agrifood products and from costlier compulsory motor thirdparty liability insurance policies affecting core inflation board members remarked that the measures designed to compensate and cap price increases for electricity and natural gas for households presumed to be applied temporarily during the 202122 winter would entail fluctuations in the forecasted path of the annual inflation rate over the short time horizon thus after a pickup in october 2021 it was expected to decline in november and then rise again in april 2022 once prices returned to the levels stipulated in the contracts the way in which the impact of compensation schemes would be included in the cpi calculation was still uncertain however and the overall balance of supplyside risks to the inflation outlook remained tilted to the upside in the short run board members concluded they referred to developments in energy and agrifood commodity prices as well as to the chronic bottlenecks in production and supply chains likely to affect also core inflation significantly inter alia via import prices moreover board members agreed that through the much steeper and more persistent climb of the annual inflation rate above the variation band of the target the inflation bout triggered and amplified in the near run by supplyside shocks might deteriorate mediumterm inflation expectations and thus generate significant secondround effects possibly via a wageprice spiral given also the labour market looseness drawing to an end the need for anchoring mediumterm inflation expectations was underscored in numerous interventions also from the perspective of central bank credibility via a new monetary policy response at the same time it was reiterated that any potential central bank attempt to ward off the direct transitory effects of adverse supplyside shocks would be not only ineffective but even counterproductive in view of the sizeable losses it would cause to economic activity and employment over a longer horizon nevertheless underlying inflationary pressures were likely to be considerably more moderate than previously anticipated although strengthening slightly in the quarters ahead board members concluded the major reason was the outlook for a much slower rise in excess aggregate demand over the forecast horizon and to markedly lower values than in the prior projection amid the more obvious deceleration expected for economic growth even assuming higher disbursements of eu funds under the next generation eu programme which would largely offset the contractionary impact of budget consolidation and fuel potential gdp dynamics in the future the likely recent exhaustion of the increase in demand for goods and services that had occurred after the easing of mobility restrictions and the impact exerted on consumer demand by the current pandemic wave and by the hefty rise in utility and food prices were also considered relevant reference was also made to the recent and prospective improvement in aggregate demand structure compared to the prepandemic period through a larger contribution of investment to the detriment of private consumption with implications also for the future performance of potential gdp conversely core inflation would continue to be more strongly affected in the period ahead by adverse supplyside shocks board members remarked mainly via direct and indirect effects of the hike in agrifood and energy commodity prices also reflected in higher inflation expectations over the short term as well as via nonenergy import prices under the circumstances the annual adjusted core2 inflation rate would probably continue to increase to a 48 percent high in mid2022 significantly above the previouslyanticipated 35 percent peak before embarking on a moderately downward path and declining at the end of the projection interval to 33 percent marginally below the august forecast looking at the future cyclical position of the economy board members showed that economic growth in 2021 would probably exceed the previously anticipated pace only marginally and solely due to the very good performance of agriculture in 2022 it would witness a relatively steeper deceleration slowing down also versus the prepandemic years even amid somewhat more pronounced expansionary effects expected from the absorption of eu funds under the next generation eu instrument the evolution implied a much slower rise in excess aggregate demand than anticipated in august on a markedly lower path over the forecast horizon it was noted that private consumption would be the major driver of gdp advance given its robust dynamics anticipated across the projection horizon albeit markedly more moderate than previously forecasted and significantly lower than the 20162019 average amid the erosion of real disposable income by the stepup in inflation and under the impact of fiscal consolidation with implications for consumer confidence as well by contrast gross fixed capital formation was foreseen to post much faster dynamics than the prepandemic average and only somewhat more moderate than projected in august board members remarked that would owe to the larger volume of public investment expenditure – inter alia with a contribution from eu funds – and the stimulative effect thus exerted on the private sector but also to the influences stemming from the surge in prices of energy and building materials as well as from bottlenecks in production and supply chains net exports were seen likely to exert a stronger contractionary impact in 2021 also against the prior forecast and a moderately lower one in 2022 amid a more obvious recovery of external demand as well as a very solid pickup in domestic absorption spurred inter alia by investment financed under the next generation eu programme the renewed worsening of the outlook on the current account deficit was deemed worrisome specifically the external deficit as a share of gdp was expected to follow a much sharper uptrend in 2021 than previously anticipated and to see only a marginal correction in 2022 implying its higher growth above european standards over the projection horizon with potential adverse effects on inflation but also on economic growth sustainability the fiscal policy stance remained however a major source of uncertainties and risks to the current forecasts board members agreed they highlighted – on one hand – the relatively low budget deficit recorded in the first nine months versus the same yearearlier period but also in relation to the target set for 2021 and – on the other hand – the specific determinants of the improvement in this year’s budget execution and the additional government spending to address the energy and public health crises alongside the unknowns about the second budget revision in 2021 it was considered that also in the context of the political crisis uncertainties were compounded by the unavailability of the 2022 draft budget that would certify the prospective stepup in fiscal consolidation in line with the commitments under the excessive deficit procedure board members were of the opinion that a high degree of uncertainty was also associated with the outlook on the absorption of eu funds allocated to romania via the recovery and resilience facility as well as of those under the new multiannual financial framework 20212027 they referred to the legal and technical procedures due for completion for the disbursement of a prefinancing under the national recovery and resilience plan alongside the firm milestones and targets to be reached for further disbursements as well as to romania’s institutional capacity and track record in that respect at the same time the fourth pandemic wave and the related containment measures continued to generate high uncertainties and risks to the forecasts at least in the near run board members pointed out amid the serious public health crisis on the domestic front and the potential implications for economic activity and labour market but also owing to the spread of the fourth wave in other european countries badly hit by the energy crisis and by the persistence of bottlenecks in production and supply chains as well board members agreed that the current juncture called for another increase in the monetary policy rate amid the gradual normalisation of the monetary policy conduct so as to bring back and maintain the annual inflation rate in line with the 25 percent ±1 percentage point flat target inter alia via the anchoring of inflation expectations over the medium term in a manner further contributing to sustainable economic growth the majority of board members were in favour of a 025 percentage point increase in the policy rate given the nature of shocks accountable for the substantial worsening of recent and future developments in headline and core inflation as well as the outlook for a much slower rise and to markedly lowerthanpreviouslyanticipated values of excess aggregate demand hence of its inflationary pressures over the short and medium term it was shown that a gradual increase in the key rate was also warranted by the high uncertainties associated with the underlying inflation factors and by the primarily downside risks posed by them to the mediumterm inflation outlook – the one which monetary policy instruments can aim a 050 percentage point rate hike was also discussed the main reasons cited being the magnitude of the upward revision of the anticipated inflation pattern and the prevalence of upside risks to the latter stemming from supplyside shocks as well as the recent approach by some central banks in the region and the real level of interest rates alongside the calendar of monetary policy meetings of the nbr board implying a relatively higher time lag between the current and the next policy meeting some members leaned toward that action the visibly more protracted upward slope of the new trajectory anticipated for the annual inflation rate was considered an additional argument in favour of a 025 percentage point increase amid the currently faster pace of adjustment of the reference rate versus traditional practice – important in terms of anchoring inflation expectations over the medium term and harmonised with approaches in the region discussants also underlined the favourable implications for monetary policy transmission and predictability as well as the importance and relevance of the signal conveyed both to the real economy and to financial markets by keeping steady the pace of increase of the monetary policy rate at the current juncture at the same time it was shown that maintaining firm control over money market liquidity and extending the interest rate corridor to ±075 percentage points – as a first step in normalising its width – were conducive to strengthening the uptrend in key interbank money market rates even amid the ample liquidity fluctuation probably triggered by autonomous factors towards yearend as well as in the context of a possible revision of economic agents’ expectations on the pace of adjustment of the policy rate moreover the importance of closely monitoring domestic and global developments was reiterated so as to enable the nbr to tailor its available instruments in order to achieve the overriding objective regarding mediumterm price stability under the circumstances the nbr board decided with a majority of votes ie 7 for and 2 against to increase the monetary policy rate to 175 percent from 150 percent two members voted for a policy rate hike to 200 percent furthermore the nbr board decided with a majority of votes ie 6 for and 3 against to extend the symmetric corridor of interest rates on standing facilities around the policy rate to ±075 percentage points from ±050 percentage points and unanimously decided to maintain firm control over money market liquidity at the same time the nbr board decided to keep the existing levels of minimum reserve requirement ratios on both leu and foreign currencydenominated liabilities of credit institutions