1

Inflation ReportMay 2016

Mugur IsărescuGovernor

Press Conference

Bucharest, 10 May 2016

2

Determinants of inflation

The cut in the standard VAT rate from 24 percent to 20 percent starting 1 January 2016

Lower imported inflation (particularly for energy and food), induced by developments in both external prices and the exchange rate

The rapid narrowing of the negative output gap

In line with the previous projection, the annual inflation ratewent deeper into negative territory in 2016 Q1

-4

-2

0

2

4

6

8

Dec.

11

Mar

.12

Jun.

12

Sep.

12

Dec.

12

Mar

.13

Jun.

13

Sep.

13

Dec.

13

Mar

.14

Jun.

14

Sep.

14

Dec.

14

Mar

.15

Jun.

15

Sep.

15

Dec.

15

Mar

.16

CPI CPI (net of the VAT first-round effect)

percent

Inflation target: 2.5% ±1 pp

Source: NIS, NBR calculations

3

The successive cuts in VAT rates affect more than 80 percent of the CPI basket

-6

-4

-2

0

2

4

6

8

10

12

-6

-4

-2

0

2

4

6

8

10

12

CPI Administeredprices

Tobacco andalcohol

Volatileprices

AdjustedCORE2

VAT effect (Jan. 2016)VAT effect (Jun. 2015)annual inflation rate, net of the VAT effectsannual inflation rate (rhs.)

contributions to annual inflation rate, pp percent

Source: NIS, NBR estimates and calculations

Estimated first-round impact of VAT rate changes- March 2016 -

The standard VAT rate cut (Jan. 2016) impacted about a half of the CPI basket

The pass-through coefficient was estimated at 71 percent, below those in the previous cutting stages (93 percent in Sept. 2013 and 80 percent in Jun. 2015) Possible explanations lie in: the fast

improvement in the economy’s cyclical position, the weaker competition on the targeted market segments, and the lower visibility of the respective products compared to previous episodes

By group of products, the pass-through was uneven: Almost full for goods and services with

administered prices

50 percent and 21 percent respectively for non-food items and market services (excluding telephony services), in correlation with competitive pressures

4

Negative annual dynamics of administered prices amid:

-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

3

Jan.

15

Feb.

15

Mar

. 15

Apr.

15

May

. 15

Jun.

15

Jul.

15

Aug.

15

Sep.

15

Oct

. 15

Nov.

15

Dec.

15

Jan.

16

Feb.

16

Mar

. 16

electricity VAT first-round effectnatural gas othersmonthly change (rhs.)

Source: NIS, NBR estimates and calculations

contributions to the monthly rate, pp percent

-2

-1

0

1

2

3

4annual percentage change

Administered prices

Very high pass-through of the standard VAT rate cut

Fall in electricity distribution tariffs, which offset the effects of the new price deregulation stage

Market operators’ (historically traced) reluctance to raise prices, possibly in the context of the electoral year

5

The year-on-year decline in the fuel price grew larger in 2016 Q1, mainly on account of the decrease in the crude oil price in lei

Weaker US dollar against the euro

Slower fall, in annual terms, in oil prices towards the end of 2016 Q1, amid signals on shrinking output in the USA and a possible agreement between the main producers to freeze output-20

-15

-10

-5

0

5

10

Jan.

15

Feb.

15

Mar

.15

Apr.1

5

May

.15

Jun.

15

Jul.1

5

Aug.

15

Sep.

15

Oct

.15

Nov.

15

Dec.

15

Jan.

16

Feb.

16

Mar

.16

VAT direct effect other factors oil prices exchange rate

-8

-6

-4

-2

0 annual percentage change

Fuel prices

contributions to the annual rate, pp

Source: NIS, Bloomberg, NBR estimates and calculations

6

The growth rate of food prices illustrates further the oversupply on the EU market induced by Russia’s import ban

-20

-16

-12

-8

-4

0

4

8

12

16

20

24

28

32

Mar

.09

Oct

.09

May

.10

Dec.

10Ju

l.11

Feb.

12Se

p.12

Apr.1

3No

v.13

Jun.

14Ja

n.15

Aug.

15M

ar.1

6

VFE

CORE3 – food0

50

100

150

200

80

90

100

110

120

2013Q1 Q3

2014Q1 Q3

2015Q1 Q3

2016Q1*

purchases within the EUexports to Russia (rhs.)imports from Turkey (rhs.)

Trade in food – EU28**

index, 2013 Q1=100index, 2013 Q1=100

Russia's ban on:- EU (Aug. 2014)- Turkey (Jan. 2016)

Source: NIS, Comext, Bloomberg, NBR estimates and calculations

Consumer prices on the domestic market

annual percentage change (excl. VAT)

*) Jan.**) seasonally adjusted data

0

50

100

150

200

250

300

Mar

.09

Oct

.09

May

.10

Dec.

10Ju

l.11

Feb.

12Se

p.12

Apr.1

3No

v.13

Jun.

14Ja

n.15

Aug.

15M

ar.1

6

wheatmaizesunflowersugar

International agri-food commodity prices

index, Jan. 2009=100

7

Persistently low inflation at global level,in correlation with developments in commodity prices

-1

0

1

2

3

4

5

6

Jan.

09

Jul.0

9

Jan.

10

Jul.1

0

Jan.

11

Jul.1

1

Jan.

12

Jul.1

2

Jan.

13

Jul.1

3

Jan.

14

Jul.1

4

Jan.

15

Jul.1

5

Jan.

16

United Kingdom

-1.5-1.0-0.50.00.51.01.52.02.53.03.5

Jan.

09

Jul.0

9

Jan.

10

Jul.1

0

Jan.

11

Jul.1

1

Jan.

12

Jul.1

2

Jan.

13

Jul.1

3

Jan.

14

Jul.1

4

Jan.

15

Jul.1

5

Jan.

16

USA

annual percentage change

2%

PCE* index

-0.50.00.51.01.52.02.53.03.54.04.5

Jan.

09

Jul.0

9

Jan.

10

Jul.1

0

Jan.

11

Jul.1

1

Jan.

12

Jul.1

2

Jan.

13

Jul.1

3

Jan.

14

Jul.1

4

Jan.

15

Jul.1

5

Jan.

16

Czech Republic

annual percentage change

2% ± 1pp

CPI

-2

-1

0

1

2

3

4

5

6

7

Jan.

09

Jul.0

9

Jan.

10

Jul.1

0

Jan.

11

Jul.1

1

Jan.

12

Jul.1

2

Jan.

13

Jul.1

3

Jan.

14

Jul.1

4

Jan.

15

Jul.1

5

Jan.

16

Hungary

3% ± 1pp

CPI

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan.

09

Jul.0

9

Jan.

10

Jul.1

0

Jan.

11

Jul.1

1

Jan.

12

Jul.1

2

Jan.

13

Jul.1

3

Jan.

14

Jul.1

4

Jan.

15

Jul.1

5

Jan.

16

Polandannual percentage change

2.5% ± 1pp

CPI

Source: OECD, central banks' websites, Federal Reserve Bank of St. Louis

-1.0-0.50.00.51.01.5

2.02.53.03.5

Jan.

09Ju

l.09

Jan.

10

Jul.1

0Ja

n.11

Jul.1

1Ja

n.12

Jul.1

2

Jan.

13Ju

l.13

Jan.

14Ju

l.14

Jan.

15

Jul.1

5Ja

n.16

Euro Areaannual percentage change

<2%

HICP

annual percentage change

annual percentage change

2%

CPI

*) Personal Consumption Expenditure

8

Slight increase in volatility on regional financial markets

Source: Bloomberg

RO

CZ

HUPL

Risk premium (CDS spreads, 5 years)

Exchange rate

RO

HU

CZ

PL

9

Sustained pace of increase of producer prices for consumer goods hints at emerging inflationary pressures that will eventually be reflected by the CPI inflation …

-4

-3

-2

-1

0

1

2

Jan.

14Fe

b.14

Mar

.14

Apr.1

4M

ay.1

4Ju

n.14

Jul.1

4Au

g.14

Sep.

14O

ct.1

4No

v.14

Dec.

14Ja

n.15

Feb.

15M

ar.1

5Ap

r.15

May

.15

Jun.

15Ju

l.15

Aug.

15Se

p.15

Oct

.15

Nov.

15De

c.15

Jan.

16Fe

b.16

Mar

.16

net of the VAT first-round effect

actual0

1

2

3

4

5

6

Jan.

14Fe

b.14

Mar

.14

Apr.1

4M

ay.1

4Ju

n.14

Jul.1

4Au

g.14

Sep.

14O

ct.1

4No

v.14

Dec.

14Ja

n.15

Feb.

15M

ar.1

5Ap

r.15

May

.15

Jun.

15Ju

l.15

Aug.

15Se

p.15

Oct

.15

Nov.

15De

c.15

Jan.

16Fe

b.16

Mar

.16

consumer goodsdurablesnon-durables

Industrial producer prices on the domestic marketannual percentage change

Adjusted CORE2 inflationannual percentage change

Source: NIS, NBR estimates and calculations

10

… especially given the narrowing of the negative output gap

-4

-3

-2

-1

0

1

2

3

2014Q1 Q3

2015Q1 Q3

2016Q1 Q3

2017Q1 Q3

2018Q1

% of potential GDP

Projection

Output gap

Source: NIS, EC-DG ECFIN survey, NBR estimates and projections

55

60

65

70

75

80

85

90

2008Q2

2010Q2

2012Q2

2014Q2

2016Q2

Capacity utilisation rate in industry

capital goodsdurablesnon-durables

4-quarter moving average, %

-40

-30

-20

-10

0

10

20

30

2007Q2 Q4

2010Q2 Q4

2013Q2 Q4

2016Q2*

savingsunemploymenteconomic contextfinancial standingconfidence indicator

points

Consumer confidence**

*) Apr.**) deviation from the historical average (Jul. 2001-Apr. 2016)

11

Strong increase in domestic absorption, …

-10

-5

0

5

10

15

20

25

2013Q1 Q3

2014Q1 Q3

2015Q1 Q3

2016Q1*

private consumption**trade in durablestrade in non-durablesmarket services to households

Private consumptionannual percentage change

-36

-24

-12

0

12

24

36

48

2013Q1 Q3

2014Q1 Q3

2015Q1 Q3

2016Q1*

gross fixed capital formation**construction worksequipment**

Investmentannual percentage change

Source: NIS, NBR calculations

*) Jan.-Feb., except for trade in non-durables (data for 2016 Q1)**) Data available up to 2015 Q4

12

… but local supply fails to accommodate the advance in domestic demand

-15

-10

-5

0

5

10

15

20

2013Q1 Q2 Q3 Q4

2014Q1 Q2 Q3 Q4

2015Q1 Q2 Q3 Q4

2016Q1*

Demand for and supply of consumer goods

turnover in retail (excl. auto)turnover in industry: domestic marketimports

real annual percentage change

Source: NIS, Eurostat, NBR calculations

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

2013Q1 Q2 Q3 Q4

2014Q1 Q2 Q3 Q4

2015Q1 Q2 Q3 Q4

Balance of goods

consumer goodsother goodsgoods deficit

EUR billion

*) Jan.-Feb. for the turnover in industry; Jan. for imports

13

The closing of the negative output gap is hinted at not only by the economic activity indicators, but also by the labour market tightening trend

0.00

0.04

0.08

0.12

0.16

0.20

0.24

0

3

6

9

12

15

18

2013Q1 Q3

2014Q1 Q3

2015Q1 Q3

2016Q1

number of employees*nominal gross wagetightness indicator (rhs.)**

-5

0

5

10

15

20

25

2013Q1 Q3

2014Q1 Q3

2015Q1 Q3

2016Q1

number of employees*nominal gross wage

annual percentage change

Public sector

-15

-10

-5

0

5

10

15

-15

-10

-5

0

5

10

15

2013Q1 Q3

2014Q1 Q3

2015Q1 Q3

2016Q1*

labour productivityaverage gross wageunit wage cost (rhs.)

annual percentage changecontributions, pp

Industryannual percentage change

*) Jan. - Feb.**) Calculated as a ratio of the economy-widejob vacancy rate to unemployment rate, seasonally adjusted dataSource: NIS, Eurostat, NBR calculations

Private sector

14

Leu-denominated credit to households rose faster, currently accounting for the prevailing share of total loans

20

30

40

50

60

70

80

Jan.

14M

ar.1

4M

ay.1

4Ju

l.14

Sep.

14No

v.14

Jan.

15M

ar.1

5M

ay.1

5Ju

l.15

Sep.

15No

v.15

Jan.

16M

ar.1

6

lei

foreign currency

lei billion

Source: NBR

0

2

4

6

8

10

12

Jan.

14M

ar.1

4M

ay.1

4Ju

l.14

Sep.

14No

v.14

Jan.

15M

ar.1

5M

ay.1

5Ju

l.15

Sep.

15No

v.15

Jan.

16M

ar.1

6

leieuromonetary policy rate

% p.a.

Interest rate on new loans to households

-20

-10

0

10

20

30

40

Jan.

14M

ar.1

4M

ay.1

4Ju

l.14

Sep.

14No

v.14

Jan.

15M

ar.1

5M

ay.1

5Ju

l.15

Sep.

15No

v.15

Jan.

16M

ar.1

6

total

lei

foreign currency

annual percentage change

Loans to households (stock)

15

The successive VAT rate cuts did not have a persistent impact on economic agents’ inflation expectations

-30

-20

-10

0

10

20

30

Jan.

15

Feb.

15

Mar

.15

Apr.1

5

May

.15

Jun.

15

Jul.1

5

Aug.

15

Sep.

15

Oct

.15

Nov.

15

Dec.

15

Jan.

16

Feb.

16

Mar

.16

manufacturingtradeservicesconsumers (12M ahead)

balance of answers (%); 3M ahead, s.a.

*) The annual inflation staying inside the variation band [± 5%] indicates the relative price stability over the expectation horizon.

Source: EC-DG ECFIN survey, NBR survey among financial analysts

Expectations of economic agents*

-1

0

1

2

3

4

5

Jan.

15

Feb.

15

Mar

.15

Apr.1

5

May

.15

Jun.

15

Jul.1

5

Aug.

15

Sep.

15

Oct

.15

Nov.

15

Dec.

15

Jan.

16

Feb.

16

Mar

.16

Apr.1

6

inflation rate 1 year aheadinflation rate 2 years ahead

Expectations of financial analysts

%

Inflation target: 2.5% ±1 pp

16

Annual CPI inflation forecast

The trajectory of the annual CPI inflation rate is below that projected in the February 2016 IR: Forecasted values: 0.6 percent in 2016

(-0.8 p.p.) and 2.7 percent in 2017 (-0.7 p.p.)

Downward revisions due to:

recent decreases in administered prices(energy)

downward revision of the output gap,following the likely effects of implementing the Law on debt discharge

persistent disinflationary pressures from the external environment (euro area inflation)

Excluding the first-round effects of VAT rate cuts, the annual CPI inflation rate is projected at 1.9 percent in 2016 and2.9 percent in 2017

-4

-2

0

2

4

6

8

10

12

2014Q1

2015Q1

2016Q1

2017Q1

2018Q1

uncertainty interval

annual CPI inflation rate(previous round)annual CPI inflation rate

mid-point of the annual target(2.5 percent as of 2013)variation band of the target

annual CPI inflation rate,net of the VAT first-round effect

annual percentage change

Inflation target:2.5% ±1pp

Note: The uncertainty interval is calculated based on the forecast errors of the annual CPI inflation rate in the NBR projections during 2005-2015. The magnitude of forecast errors is positively correlated with the time horizon they refer to.

Source: NIS, NBR calculations and projections

17

Components’ contribution to the annual inflation forecast– Dec. year T/Dec. year T-1 –

Source: NBR projections

2016 2017tobacco products and alcohol 0.0 0.0fuels 0.1 -0.2VFE 0.4 0.4administered prices -0.4 0.4adjusted CORE2 0.5 2.0CPI inflation 0.6 2.7

0.6%

2.7%

-1

0

1

2

3percentage points

Note: The values in the table have been rounded off to one decimal place.

18

External assumptions underlying the projection The scenario for developments in the effective EU GDP* foresees a gradual consolidation of external

demand

The annual HICP inflation rate for the euro area is seen remaining below the 2 percent benchmark, rising progressively until the projection horizon

The nominal 3M EURIBOR is projected to stick to slightly negative levels through most of the forecast interval, amid anticipations of a persistently accommodative ECB monetary policy stance

1.9 1.92.1 2.0

1.00

0.24

1.51 1.45

-0.21 -0.24 -0.12 -0.25

37 4044 45

-14

0

14

28

42

56

70

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2016 2017 2016 2017 2016 2017 2016 2017

USD/barrelpercent

February 2016 IRMay 2016 IR

Effective EU economic growth*

Euro area annual inflation 3M 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 data provided by European Commission, Consensus Economics and Bloomberg (futures prices)

19

Exogenous pressures on inflation

Dynamics of administered prices:

Incorporate the latest developments in these types of prices, known at the time of completing the projection, and the information provided by the relevant domestic authorities

The forecast for 2016 has been revised downwards by 2.4 percentage points, especially amid the recent reductions in administered prices (energy)

The trajectory of volatile food prices is marked primarily by the fading out, in June 2016, of the first-round effect of broadening the scope of the reduced VAT rate on food items; afterwards, it is seen stabilising around 6 percent at the projection horizon

-4-202468

2014Q1

2015Q1

2016Q1

2017Q1

2018Q1

Administered prices annual inflation

May 2016 IRFebruary 2016 IR

end of period, %

-9-6-30369

2014Q1

2015Q1

2016Q1

2017Q1

2018Q1

May 2016 IRFebruary 2016 IR

end of period, %

Volatile food prices annual inflation

Source: NIS, NBR projections

20

Revision of the output gap projection– compared to the previous forecasting round –

*) The downward arrows show more restrictive or less stimulativeinfluences on the output gap than in the previous forecasting round.

**) The impact of this factor has been included in the baseline scenarioin the current forecasting round and is assessed as restrictive on theoutput gap.

-4

-3

-2

-1

0

1

2

3

2014Q1

2015Q1

2016Q1

2017Q1

2018Q1

May 2016 IR

February 2016 IR

Output gap

% of potential GDP

Source: NIS, NBR estimates and projections

FactorsRevision impact on output gap*

2016 2017

Fiscal policy stance

Real broad monetary conditions: adequate for ensuring price stability over the medium term, contributing to sustainable economic growth

External demand – –

Implementation of the Law on debt discharge**

21

Determinants of annual adjusted CORE2 inflation projection

The projected path of the annual adjusted CORE2 inflation rate is marked, on one hand, by the successive VAT rate cuts and, subsequently, by the fading out of the statistical first-round effects of these cuts and, on the other hand, by stronger underlying inflationary pressures: Reversal of the cyclical position of the

economy in 2016 Q3, owing also to the expansionary fiscal policy stance, followed by a rise in excess demand, along with the faster dynamics of unit wage costs economy-wide

Upward adjustment of inflation expectations*, as the first-round effects of the VAT rate cuts fade out and the second-round ones abate

Progressively higher import prices, amid the foreseen evolution of external prices

*) backward- and forward-looking

-6

-4

-2

0

2

4

2014Q1

2015Q1

2016Q1

2017Q1

2018Q1

VATimport pricesoutput gapinflation expectationsannual adjusted CORE2 inflation rate, net of the VAT first-round effect (%)annual adjusted CORE2 inflation rate (%)

Contributions to annual adjusted CORE2 inflation (pp)

Note: The annual adjusted CORE2 inflation is calculated as a quarterly average, in line with its econometrically-modelled determinants.

Source: NBR calculations

22

Annual adjusted CORE2 inflation projection– compared to the previous forecasting round –

The projected path of the annual adjusted CORE2 inflation rate has been revised downwards from the previous round, due to:

Weaker inflationary pressures from aggregate demand, owing also to the anticipated effects of the Law on debt discharge

Downward reassessment of inflationary pressures from import prices, amid the significantly downward-revised dynamics of external prices -5

-4

-3

-2

-1

0

1

2

3

4

5

2014Q1

2015Q1

2016Q1

2017Q1

2018Q1

Annual adjusted CORE2 inflation

May 2016 IR(net of the VATfirst-round effect)

February 2016 IR

May 2016 IR

end of period, %

Source: NIS, NBR projections

23

Causes Balance of risks to the inflation path

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, the potential Brexit, and Greece’s sovereign debt sustainability issues

Balanced,surrounded

by high uncertainty

Uncertainty about the domestic macroeconomic policy mix:

– fiscal policy stance, given the uncertainty surrounding the impact that the announced fiscal easing measures might have on macroeconomic equilibria

– income policy, given the impact that the pay rises implemented at end-2015 and the possible additional hikes might have on the future configuration of fiscal parameters and on the dynamics of unit labour costs

– the impact of the Law on debt discharge

Tilted to the upside

Global commodity prices Tilted to the downside

Dynamics of administered prices (assessments depending on possiblereconfigurations of information supplied by the relevant Romanian authorities)

Tilted to the downside

Potential causes for inflation to deviate from the projected path

24

To keep the monetary policy rate at 1.75 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 currency-denominated liabilities of credit institutions

Decisions of the NBR Board*

*) meeting of 5 May 2016

25

Calendar of NBR Board meetings on monetary policy issues

*) review and approval of the quarterly Inflation Report

30 June 2016

4 August 2016*

30 September 2016

4 November 2016*

6 January 2017

7 February 2017*

26

At the end of the press conference, the following will be available on the NBR website (www.bnr.ro):

Infla on Report − May 2016, full version (in Romanian)

Summary of the Infla on Report − May 2016 (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)

27

Direct inflation targeting: a decade since adoption

28

Pro memoria

The direct inflation targeting strategy was adopted in Romania in August 2005

The shift to this strategy was preannounced in official documents of the Government of Romania – Pre-Accession Economic Programmes, starting 2001

The new monetary policy strategy implied:

proactive monetary policy stance (current response to anticipated future developments)

enhanced transparency of monetary policy, by communicating to the public the objectives, the adopted decisions and the rationale behind them

29

The features of the strategy, publicly announced ever since its adoption (2005)

Inflation target specified in terms of CPI

Target set as a midpoint within a variation band

Annual inflation targets with a multi-annual perspective

Setting the targets by consultation with the Government

Ex-ante definition of “escape clauses”, which condition the responsibility of the National Bank of Romania for attaining the inflation targets

30

Target setting

Inflation targets were set by consultation with the Government and formally laid down in Romania’s convergence programmes (approved in Government meetings)

For example, the current multi-annual flat inflation target of 2.5 percent ±1 percentage point was preannounced in the 2011-2014 Convergence Programme:

“Monetary policy will remain firmly oriented towards meeting the inflation targets set by the NBR together with the Government and implicitly ensuring a long-lasting reduction in the medium-term inflation rate to levels in line with the ECB’s quantitative definition of price stability. In this respect, an underpinning is expected to be provided by the adoption of a multi-annual flat inflation target of 2.5 percent ±1 percentage point as from 2013”

In fact, the targets have also appeared in the documents signed by Romania in the context of the financing or precautionary arrangements with the EU, IMF and international financial institutions

31

Transparency of monetary policy decisions

Ensured by:

Publication of the calendar of Board meetings on monetary policy issues

Publication of press releases, which are presented by the NBR Governor during press briefings held after each monetary policy meeting of the Board

Disclosure of data underlying the monetary policy analyses

Presentation by the NBR Governor, in a press conference, of the quarterly Inflation Report

The Report includes the macroeconomic forecasts, the rationale behind monetary policy decisions, explanations for inflation developments vis-à-vis the target, and the causes for potential temporary slippages from the inflation target

After the public presentation, the Report is submitted to the key State institutions (Presidency, Parliament, Government)

Presentation of the monetary policy framework to the public via periodic conferences

32

Publishing the minutes of the Board meetings

Publishing the transcript of monetary policy meetings is by no means a widespread practice across EU central banks

Generally, the central banks that release monetary policy minutes (within one month of the meeting) publish summaries only, without disclosing the speakers’ names

It is also the case of the ECB, which embraced this practice as late as 2015

As regards the NBR, the monetary policy decision is explained

In an abridged form, in the press release

In an in-depth and detailed form, in the Inflation Report and in the public presentation delivered by the NBR Governor at the launch of the Report

The Policy assessment section of the Inflation Report is virtually similar, in terms of content, to the minutes published by some central banks

33

Publishing the minutes of the Board meetings (2)

Release

Minutes (summary of discussions) Transcript Votes

ECB Yes(without names) No No

FED Yes(with names)

Yes Yes

Bank of England Yes(without names)

No Yes

Bank of Israel Yes(without names)

No No

National Bank of Poland Yes(without names)

No Yes

34

Escape clauses

The ex-ante definition of a narrow set of exceptional circumstances that are beyond the control of monetary policy and condition the monetary authority’s responsibility for attaining the target can be found in the inflation targeting framework of several central banks Examples: New Zealand, Canada, Czech Republic

As far as Romania is concerned, escape clauses refer to: Marked increases/decreases in external prices of raw materials, energy-producing materials

and other commodities

Natural disasters and other similar exceptional events that induce cost-push or demand-pull inflationary effects, as well as unpredictable changes on the agricultural produce market

Large fluctuations of the exchange rate of the leu that are decoupled from domestic economic fundamentals, as well as from the monetary policy pursued by the National Bank of Romania

Major deviations from the administered price adjustment programme announced by the Government, in terms of both magnitude and proposed calendar

Divergence of the fiscal and income policies, in terms of implementation and outcomes, from the programmed coordinates

35

Why are escape clauses necessary?

Monetary policy acts on inflation by means of its influence on aggregate demand and on economic agents’ inflation expectations

BUT

Inflation may be temporarily affected by supply-side shocks Examples: considerable fluctuations in agri-food and energy commodity prices or

changes in indirect taxes (VAT, excise duties)

The monetary policy’s adequate response to these shocks is to accommodate direct effects, since any attempt at warding them off would be not only ineffective, but even counterproductive Forcing a quick correction of any slippage from the inflation target by countering direct

effects would imply sudden and sizeable movements in monetary policy instruments destabilising the real economy new deviations of inflation from the target over the medium term accepting temporary slippages of inflation from the target is preferable

Any countering response would be warranted only by a significant risk of disanchoring of medium-term inflation expectations, which would entail second-round effects via changes in the price- and wage-setting behaviour

36

Influence of exogenous shocks on the inflation rate

-6

-4

-2

0

2

4

6

8

10

-6

-4

-2

0

2

4

6

8

10

Dec.05 Dec.06 Dec.07 Dec.08 Dec.09 Dec.10 Dec.11 Dec.12 Dec.13 Dec.14 Dec.15

adjusted CORE2 administered prices volatile prices*

tobacco and alcohol** VAT first-round effects CPI (rhs.)

contributions to the annual inflation rate (pp) annual percentage change

Source: NIS, NBR calculations

*) Fuels, vegetables, fruit, eggs

**) Prices impacted by sizeable changes in excise duties

Inflation target