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Minutes of the monetary policy meeting of the National Bank of Romania Board on 4 April 2024
The National Bank of Romania Board members present at the meeting: Mugur Isarescu, 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 Nicolaescu, Board member and Deputy Governor of the National Bank of Romania; Csaba Bálint, Board member; Gheorghe Gherghina, Board member; Cristian Popa, Board member; Dan-Radu Rusanu, Board member; Virgiliu-Jorj Stoenescu, Board member.
During the meeting, the Board discussed and adopted the monetary policy decision, based on the data and analyses on current and future macroeconomic, financial and monetary developments submitted by the specialised departments, as well as on other available domestic and external information.
Looking at the recent developments in inflation, Board members showed that the annual inflation rate had gone up in January 2024 in line with forecasts to reach 7.41 percent, whereas in February it had declined to 7.23 percent, further exceeding the 6.61 percent level seen in December 2023. The advance against the end of 2023 was attributable to supply-side factors, Board members deemed, underlining the sharp increase in the annual dynamics of electricity prices over that period under the impact of a base effect, as well as the pick-up in the prices of fuels and tobacco products triggered by the hike in excise duties and higher-than-expected crude oil prices.
At the same time, it was noted that the annual adjusted CORE2 inflation rate had continued to decrease January through February 2024, albeit at a slower pace than in the previous two quarters, falling to 7.6 percent in February 2024, from 8.4 percent in December 2023, amid the uneven developments in the decreases of the price dynamics of the three sub-components, namely a steep slowdown in the case of processed food and near stagnation for market services, but a mild acceleration in the non-food segment.
In that light, Board members noted the multitude of factors that had exerted a two-way impact on the dynamics of core inflation in the first two months of the year. Following the analysis, it was agreed that the prevailing, albeit on the wane, influences had continued to stem from disinflationary base effects, downward adjustments in agri-food commodity prices and the measure to cap temporarily the mark-ups on basic food products, alongside the increasingly visible impact of the falling dynamics of import prices. A moderate opposite impact had had the direct and indirect effects of the fiscal measures implemented at the beginning of 2024 and higher short-term inflation expectations, as well as the new increases in wage costs that had been recorded towards the end of the previous year and had been passed through, at least in part, into the prices of some services and goods, inter alia amid the rebound in private consumption.
In that context, reference was also made to the recent movements in industrial producer prices for consumer goods on the domestic market, the annual growth rate of which had declined at a slower pace in January 2024 and had posted a mild pick-up in February. At the same time, financial analysts’ longer-term inflation expectations remained above the variation band of the target, in spite of a decline in February-March, and the consumer purchasing power had been only moderately affected at the start of the year by the inflation rate rise, being further robust, in line with the dynamics of net real wage, several Board members pointed out.
As for the cyclical position of the economy, Board members showed that economic activity had weakened much more than anticipated in 2023 Q4, contracting by 0.5 percent versus the previous three months, after a 1.0 percent increase in Q3, which made it likely for excess aggregate demand to narrow more visibly over that period compared to expectations in February 2024.
Conversely, annual GDP growth had risen to 3.0 percent in 2023 Q4 from 1.9 percent in the previous quarter. At the same time, the annual economic growth had continued to be bolstered primarily by gross fixed capital formation, albeit to a lower extent, while household consumption had made a significantly larger contribution than in the previous quarter, Board members noted. Nevertheless, the contribution of net exports had seen a renewed strong contraction in 2023 Q4, given that the annual change in the imports of goods and services had rebounded, re-entering positive territory and thus outpacing that of exports. Against that background, the trade deficit and the current account deficit had posted an annual increase in 2023 Q4 – after three quarters of decline – which, in the latter’s case, had been amplified by the marked worsening of the primary income balance, on account of developments in reinvested earnings and distributed dividends.
However, in 2023 overall, both deficits had narrowed visibly versus 2022, while the current account deficit-to-GDP ratio had shrunk to 7.0 percent, from 9.2 percent, amid a significant slowdown in economic growth, to 2.1 percent, from 4.1 percent in the previous year. The latter had nevertheless remained relatively solid, especially from a European and regional perspective, several Board members underlined. It was also noted that gross fixed capital formation had become the main driver of economic growth in 2023, its contribution having markedly outpaced that of private consumption, whereas the negative contribution of net exports had become zero.
Looking at the labour market, Board members discussed the latest data and surveys that confirmed, in their view, the easing of market tensions in 2023 Q4 – given, inter alia the notable fall in the job vacancy rate –, while sending out mixed signals on the developments in the specific parameters in 2024 Q1 and in the near future. Thus, the ILO unemployment rate had advanced slightly at the beginning of 2024, after three quarters of relative stagnation at an average 5.6 percent level, whereas the number of employees economy-wide had resumed its monthly increase in December 2023 and had gone up at a similar pace in January 2024. At the same time, employment intentions over the very short horizon had seen an upturn in February-March 2024, while the labour shortage reported by companies had widened in 2024 Q1 overall, on account of developments in services and construction.
The dynamics of wages and labour costs were deemed a reason for concern from the perspective of inflation, but also of external competitiveness, given that the double-digit annual dynamics of the average gross nominal wage had posted a renewed pick-up in 2023 Q4 – mainly under the impact of the rise in the gross minimum wage economy-wide – and that the growth rate of unit labour costs had seen a re-acceleration over the same period, both across the economy as a whole, as well as in industry, where it had increased in January 2024 too.
At the same time, structural deficiencies in the labour market and public sector wage dynamics, as well as the expected new increase in the gross minimum wage were likely to fuel or even amplify in the short term the pressures on wages and labour costs in the private sector, Board members repeatedly showed. However, the downward trend of the inflation rate and the still sluggish dynamics of domestic and external demand, as well as the higher resort by employers to workers from outside the EU, could act in the opposite direction, some Board members deemed. In that context, members underlined the importance of closely monitoring wage increases in the private sector in 2024 Q1, in the context of wage renegotiations.
Turning to financial conditions, Board members pointed out the relative stability of the main interbank money market rates in February and in the first part of March, followed however by new mild declines towards the end of the quarter. Reference was also made to the markedly upward, yet strongly fluctuating path that long-term yields on government securities had stayed on during that period, similarly to developments in advanced economies and in the region. That had occurred amid the revision and subsequent consolidation of investor expectations for the timing and magnitude of interest rate cuts by the Fed, with an impact on global risk appetite as well.
Against that background, the EUR/RON exchange rate had stuck in February to the higher readings reached in mid-January, but then had witnessed a slight downward correction, returning and stabilising in March close to the values prevailing in 2023 Q4. In relation to the US dollar, the leu had depreciated further until mid-Q1, before recovering some of the lost ground, inter alia amid developments in the EUR/USD exchange rate on international financial markets.
Risks to the behaviour of the EUR/RON exchange rate remained elevated, Board members deemed, referring to the considerable external disequilibrium and its recent re-escalation trend, as well as to the January-February budget execution and the uncertainties surrounding the fiscal consolidation process, but also to the current geopolitical tensions. Members were of the opinion that the still high relative attractiveness of investments in domestic currency and the expectations on the outlook for major central banks’ key rates would nevertheless continue to have a prevailing influence over the near term.
At the same time, it was observed that the annual growth rate of credit to the private sector had re-embarked on a downward course at the onset of 2024, falling to 4.9 percent in February from 6.4 percent in December 2023, amid developments in loans to non-financial corporations, whereas the dynamics of household credit had picked up further, albeit from a very low level. The share of the leu-denominated component in credit to the private sector had widened over that period, to 68.7 percent in February 2024 from 68.4 percent in December 2023.
As for future developments, Board members showed that, according to the new assessments, the annual inflation rate would decline further over the following months, at a slower pace compared to 2023 and on a slightly higher path than that anticipated in the February 2024 medium-term forecast, which had seen it go down to 4.7 percent in December 2024 and to 3.5 percent at end-2025.
It was noted that the decrease would be further driven to a large extent by supply-side factors, whose disinflationary action was expected to weaken however gradually, amid the softening influences from base effects and from downward corrections of commodity prices, especially of agri-food items. The disinflationary action would particularly reflect in core inflation and VFE prices, whereas fuel price dynamics would probably follow a steeper upward path in the near run, also in relation to the previous forecast, due to the larger-than-expected increase in oil prices over the past months, Board members remarked.
Moreover, in the Board members’ opinion, the balance of risks to the inflation outlook stemming from supply-side factors remained tilted to the upside. They referred to the fiscal measures implemented recently, but possibly also in the future, for underpinning the budget consolidation process, as well as to the measure for capping the mark-ups on basic food products, extended until end-2024, but also to the potential future evolution of crude oil prices, inter alia amid geopolitical tensions.
At the same time, it was agreed that underlying inflationary pressures were anticipated to be only somewhat more modest than in the prior forecast and slightly increasing in the near run, amid prospects of a mild widening of the positive output gap in the first part of 2024, after the above-expectations contraction in 2023 Q4, alongside the swifter-than-previously-projected dynamics of unit labour costs. Sizeable disinflationary influences would, however, probably stem from the slacker growth rate of import prices and the gradual downward adjustment of short-term inflation expectations, several Board members underlined.
Turning to the near-term outlook for the cyclical position of the economy, Board members observed that, according to the new assessments, the economy was expected to witness more solid quarterly increases in the first part of 2024 than previously anticipated, implying nevertheless a significant drop in its annual dynamics compared to the level reached in 2023 Q4.
Furthermore, it was noted that, according to high-frequency indicators, private consumption had been the main driver of annual economic growth during 2024 Q1, given especially the strong pick-up in the dynamics of retail sales in January versus the same year-earlier period. A larger negative contribution was, however, possible from net exports, as the annual dynamics of imports of goods and services had further exceeded in January 2024 those of exports, but to a lower extent than in the previous quarter, marginally re-entering negative territory. Against that background, the trade deficit had continued to widen in annual terms, albeit more moderately than in 2023 Q4, while the current account deficit had seen its annual dynamics step up considerably, as a result of the worsening of the income balances, Board members repeatedly pointed out.
At the same time, the uncertainties and risks associated with the future fiscal and income policy stance were compounded over the short term by the outcome of the budget execution in the first two months of the year, as well as by the public sector wage dynamics and the implications of the new law on pensions, Board members remarked numerous times. Beyond the short-term horizon, the major source of heightened risks consisted, instead, of the fiscal and budgetary measures that might be implemented to put the budget deficit onto a sustainable downward path, compatible with the requirements of the excessive deficit procedure and with the conditionalities attached to other agreements signed with the EC, Board members remarked.
Mention was also made, nevertheless, of the uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, further arising from the war in Ukraine and the Middle East conflict, as well as from the economic performance in Europe, particularly in Germany.
Also from that perspective, Board members underscored again the importance of keeping the fast pace of absorbing EU funds and reiterated the requirement for the efficient use thereof, including those under the Next Generation EU programme, which were essential for carrying out the necessary structural reforms and energy transition, but also for counterbalancing, at least in part, the contractionary impact exerted by geopolitical conflicts.
Board members were of the unanimous opinion that the reviewed context overall warranted keeping the monetary policy rate unchanged, with a view to bringing the annual inflation rate back in line with the 2.5 percent ±1 percentage point flat target on a lasting basis, inter alia by anchoring medium-term inflation expectations, in a manner conducive to achieving sustainable economic growth.
Moreover, Board members reiterated the importance of further closely monitoring domestic and global developments so as to enable the NBR to tailor its available instruments in order to achieve the overriding objective regarding medium-term price stability.
Under the circumstances, the NBR Board unanimously decided to keep the monetary policy rate at 7.00 percent. Furthermore, it decided to leave unchanged the lending (Lombard) facility rate at 8.00 percent and the deposit facility rate at 6.00 percent. In addition, the NBR Board unanimously decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.