The central bank also kept minimum reserve requirements on foreign currency liabilities and for leu deposits unchanged at 8%.
Central bank governor Mugur Isarescu said in July after the previous rate meeting the bank will inevitably raise its benchmark interest when inflation rises. The central bank sees inflation at 1.6% this year and 3.1% in 2018.
The central bank said in a detailed statement the annual inflation rate followed a steeper upward trend in June 2017, standing at a higher-than-forecast 0.85%, against 0.64% the previous month, due to the evolution of volatile food prices and tobacco prices, as well as the acceleration of core inflation. Their effects were partly offset by the impact of slower annual dynamics of fuel prices. In the absence of the VAT rate cut and other changes in the non-tax fees and charges, the inflation rate would have climbed to 1.9% in June 2017 and stayed in the variation band of the flat target.
Revised economic growth data for the first quarter of 2017 reconfirm the step-up in the annual dynamics of real GDP to 5.7% (from 4.8% in the previous quarter). The faster growth rate owed entirely to domestic demand – private consumption expanded by 7.3% (contributing 5.3 percentage points to GDP growth) under the impact of fiscal and wage measures and the improvement in employment. Although still positive, the contribution of net exports to GDP growth dropped significantly (to 0.2 percentage points), amid the narrowing of the favorable spread between the growth rate of exports of goods and services (among the fastest over the last three years) and that of imports thereof.
Real monetary conditions have a pronounced stimulative nature. The annual dynamics of credit to the private sector resumed its rise in June, reaching 4.2%, from 3.2% in the previous month, due largely to a renewed pick-up in the growth of leu-denominated component to non-financial corporations and both local- and foreign-currency loans to non-monetary financial institutions. The share of leu-denominated credit in total private sector loans continued to widen to 60.2%, a record high since December 1996. This certifies the improvement in monetary policy transmission, while also helping mitigate risks to financial stability, the central bank said.
The central bank board also examined and approved the August 2017 inflation report in Friday’s meeting. The new scenario of the projection reconfirms the prospects for a speed-up in inflation throughout the forecast interval. Compared to the previous report, the rising path of the projected annual inflation rate was revised upwards over the entire forecast period, particularly in the short term, remaining, however, within the variation band of the target.
The uncertainties and risks associated with this outlook stem from the domestic and external environment. Domestically, they are compounded by the fiscal and income policy stance, also ahead of the envisaged budget revision.
Turning to the external environment, further relevant are the uncertainties and risks relative to economic growth and inflation developments in the euro area and worldwide, amid Brexit talks and the US economic policies. Monetary policy stances of the major central banks and their implications on the local financial market, also in the present and future economic and financial context in the region, continue to generate uncertainty and risks as well.