Romania: National Bank Keeps Monetary Policy Rate at 6.50 pc

In its meeting on 8 November 2024, the Board of the National Bank of Romania decided the following:

• to keep the monetary policy rate at 6.50 per cent per annum;
• to leave unchanged the lending (Lombard) facility rate at 7.50 per cent per annum and the deposit facility rate at 5.50 per cent per annum;
• to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The annual inflation rate fell to 4.62 per cent in September from 5.10 per cent in August 2024. The decrease was mainly driven by lower fuel and energy prices, especially amid the drop in crude oil prices, which outweighed the impact of the new increases seen this month in food and tobacco product prices.

In 2024 Q3, the annual inflation rate continued to decline, albeit more slowly than in the previous three months, compared to forecasts. In September versus June, it fell by 0.32 percentage points (from 4.94 per cent), as the sharp decreases in the dynamics of administered prices and fuel prices during this period – due to base effects and the unexpected drop in crude oil prices – were counterbalanced mainly, in terms of impact, by the hike in food prices and to a low extent by the higher electricity prices, primarily amid this year’s severe drought.

At the same time, the annual adjusted CORE2 inflation rate posted a slower downtrend in Q3, also compared with the forecast, reaching 5.6 per cent in September from 5.7 per cent in June. The deceleration was further driven by the disinflationary base effects in non-food sub-components and by the decrease in import price dynamics. The influence of these factors was substantially mitigated over this period by the unfavourable statistical effect in the processed food segment and by the hike in some agri-food commodity prices, as well as by higher wage costs passed through, at least in part, into some consumer prices, among other things amid still high short-term inflation expectations and robust demand for goods.

The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP—inflation indicator for the EU Member States) fell to 4.8 per cent in September from 5.3 per cent in June 2024. At the same time, the average annual CPI inflation rate fell to 6.1 per cent in September from 7.2 per cent in June 2024. In turn, the average annual HICP inflation rate shrank to 6.4 per cent in September 2024 from 7.3 per cent in June 2024.

The recently revised statistical data show that economic activity grew by 0.3 per cent in 2024 Q2 after a 0.4 per cent contraction in the previous three months (quarterly change), which implies a narrowing of excess aggregate demand during this period.

Based on the new data, the annual GDP growth stepped up to 0.9 per cent in 2024 Q2 from 0.5 per cent in the previous quarter, mainly as a result of the surge in the annual dynamics of household consumption. However, the year-on-year increase in gross fixed capital formation slowed down significantly. Net exports exerted a notably more enormous contractionary influence, given that the volume of imports of goods and services rose faster. In contrast, the volume of exports continued to decline in annual terms. Against this background, the dynamics of the trade deficit and the current account deficit accelerated significantly in Q2, spurred in the latter case also by the considerable worsening of the secondary income balance, reflecting the developments in the inflows of EU funds to the current account.

The latest data and analyses point to more modest quarterly economic increases for 2024 H2 than previously envisaged but on a gradual step-up. This implies faster annual GDP growth in Q3, amid divergent developments in aggregate demand components and significant sectors.

Thus, from July through August 2024, the annual rate of change in retail sales was further high, down only slightly compared to the Q2 average, and motor vehicle and motorcycle sales remained unchanged. By contrast, industrial output reported a mild re-widening in its annual contraction, and the volume of construction works saw a renewed annual decline after a relative recovery in 2024 Q2.

The negative differential between the annual change in the exports of goods and services and the imports thereof narrowed significantly as the former saw a much stronger advance in July-August, returning comfortably into positive territory. Hence, the annual increases in the trade deficit and the current account deficit moderated compared to the previous quarter’s averages yet remained particularly fast-paced for the first eight months.

Looking at the labour market, the number of employees posted slight rises in June-July before its standstill in August, while the ILO unemployment rate advanced to 5.5 per cent in Q3 as a whole after its decline to 5.1 per cent in June and the 5.2 per cent average seen in the prior quarter. At the same time, for Q3 overall, surveys point to a sharp decline in employment intentions over the very short horizon, followed by their stability in October, as well as to a steeper contraction in labour shortage at the beginning of 2024 Q4. However, the two-digit annual growth rate of the nominal gross wage expanded in July-August to 16.8 per cent, after inching down in Q2, while that of unit labour costs in the industry went up to 17.8 per cent.

The primary interbank money market rates held steady in October, while long-term yields on government securities re-embarked and stayed on a steeply upward course – relatively in line with developments in advanced economies and the region –amid investors reconsidering the probable path of the Fed’s interest rate, with an impact on global risk appetite as well. Against this background, the EUR/RON exchange rate remained broadly stable in October at the higher values it had returned to in mid-Q3. The leu witnessed, however, a sizeable depreciation versus the US dollar, as the latter strengthened on international financial markets.

The annual growth rate of credit to the private sector picked up further in September, to 8.4 per cent from 7.7 per cent in August, mainly due to the faster rise in domestic currency loans to non-financial corporations, but also with a hefty contribution from the dynamics of leu-denominated credit to households. The share of the domestic currency component in credit to the private sector continued to widen, reaching 69.8 per cent from 69.7 per cent in August.

In today’s meeting, the NBR Board examined and approved the November 2024 Inflation Report, incorporating the latest available data and information.

According to the updated forecast, the annual inflation rate will pick up slightly in the closing months of this year and will see a marked fluctuation in 2025 H1; it is expected to stay above the variation band of the target and at higher values than previously anticipated, amid the two-way base effects that will be manifest over the short time horizon, but also the severe drought of 2024 and the rise in some commodity prices, further affecting food and energy price dynamics.

Moreover, the annual inflation rate is then seen resuming its decline on a higher path than in the prior projection, dropping no sooner than the onset of 2026 below the upper bound of the variation band of the target and remaining in its vicinity until the end of the forecast horizon. The decrease will continue to be driven by disinflationary base effects, alongside the influences expected to come from the deceleration in import price growth, as well as from the downward adjustment of short-term inflation expectations – on a higher path, however, than in the previous projection –, but also from the swifter contraction of excess aggregate demand compared with prior forecasts.

Significant uncertainties and risks stem from the future fiscal and income policy stance, given the fiscal-budgetary measures that might be implemented in 2025 for budget consolidation purposes. Labour market conditions and wage dynamics in the economy also remain a source of uncertainties and risks. At the same time, sizeable uncertainties are further associated with developments in energy and food prices and the future evolution of crude oil prices amid geopolitical tensions.

Heightened uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments arising from the war in Ukraine and the Middle East conflict, as well as from the economic performance in Europe and globally, in the context of escalating geopolitical tensions. Furthermore, the absorption and use of EU funds, especially those under the Next Generation EU programme, are conditional on fulfilling strict milestones and targets. However, they are essential for carrying out the necessary structural reforms, including energy transition and counterbalancing, at least in part, the contractionary impact of geopolitical conflicts.

The ECB’s and the Fed’s monetary policy decisions and the stance of central banks in the region are also relevant.

Based on the currently available data and assessments and the elevated uncertainty, the NBR Board decided in the meeting held today, 8 November 2024, to keep the monetary policy rate at 6.50 per cent per annum. Moreover, it decided to leave unchanged the lending (Lombard) facility rate at 7.50 per cent per annum and the deposit facility rate at 5.50 per cent per annum. Furthermore, the NBR Board decided to keep the existing minimum reserve requirement ratios on credit institutions’ leu- and foreign currency-denominated liabilities.

The NBR Board decisions aim to ensure and maintain price stability over the medium term, in a manner conducive to achieving sustainable economic growth. The NBR Board reiterates that, at the current juncture, the balanced macroeconomic policy mix and the implementation of structural reforms, as by using EU funds to foster the growth potential over the long term, are of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand adverse developments.

The NBR closely monitors developments in the domestic and international environment and stands ready to use its tools to achieve the fundamental objective of medium-term price stability while safeguarding financial stability.

The new quarterly Inflation Report will be presented to the public in a press conference on 11 November 2024 at 3:00 p.m. The account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the NBR’s website on 20 November 2024 at 3:00 p.m.

The next monetary policy meeting of the NBR Board will be held on 15 January 2025.