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BNR Board decisions on monetary policy
In its meeting of 13 February 2024, the Board of the National Bank of Romania (BNR) decided:
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to keep the monetary policy rate at 7.00 percent per annum;
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to leave unchanged the lending (Lombard) facility rate at 8.00 percent per annum and the deposit facility rate at 6.00 percent per annum;
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to keep 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 6.61 percent in December 2023, i.e. below the forecast, from 6.72 percent in November, amid the continued slowdown in the growth rates of processed food prices and energy prices, which more than offset, in terms of impact, the significant rebound in the annual dynamics of fuel prices, on account of a base effect.
In 2023 Q4 as a whole, the annual inflation rate decreased at a faster-than-anticipated pace, shedding 2.22 percentage points (from 8.83 percent in September), given that the dynamics of food prices and energy prices continued to decelerate at a relatively swift tempo, while the inflationary base effect in the fuels segment was fully counterbalanced by the slowdown in the growth rates of administered prices and tobacco product prices.
At the same time, the annual adjusted CORE2 inflation rate saw its downward trend steepen more than expected in 2023 Q4, going down to 8.4 percent in December, from 11.3 percent in September, against the background of more widespread disinflationary base effects, ebbing agri-food commodity prices and the measure to cap the mark-ups on basic food products, but also in the context of moderating consumer demand and the slower dynamics of import prices. Opposite, yet small influences came from the pass-through into some services prices of higher costs triggered by the hike in the minimum gross wage, as well as from the temporary worsening of short-term inflation expectations.
The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 7.0 percent in December 2023, from 9.2 percent in September. Furthermore, the average annual CPI inflation rate fell to 10.4 percent in December 2023 from 12.6 percent in September. In turn, the average annual HICP inflation rate decreased to 9.7 percent in December 2023 from 11.4 percent in September.
In 2023, the 12-month inflation rate thus declined by 9.76 percentage points (from 16.38 percent in December 2022), in the context of major, almost equal contributions from the slower growth rates of processed food prices and energy prices. Additional, but much more modest, disinflationary influences stemmed from the VFE and fuels segments, while small opposite effects were generated by the non-food and market services sub-components of core inflation.
The new statistical data reconfirm the significant, but lower-than-expected, slowdown in economic growth in 2023 Q3 to 0.9 percent from 1.5 percent in the previous three months (quarterly change), which implies a relatively moderate narrowing of excess aggregate demand over this period.
In addition, the annual GDP growth rate is reconfirmed to have remained modest from a historical perspective in 2023 Q3, at 1.1 percent, versus 1.0 percent in Q2, given that the change in inventories significantly increased its contractionary impact and the contribution of general government consumption became visibly negative. By contrast, gross fixed capital formation saw a re-acceleration in its annual growth to double-digit readings in 2023 Q3, while household consumption posted a renewed faster pick-up.
Net exports continued to exert a larger expansionary impact, given the further widening during this period too of the positive differential between the dynamics of exports of goods and services, in terms of volume, and those of imports, amid the latter falling more visibly into negative territory. Consequently, the trade deficit saw a renewed slightly faster annual decline, whereas the current account deficit posted further a significant year-on-year narrowing, albeit somewhat more modest than in Q2, given the slower pace of improvement in the primary income balance, on account of reinvested earnings.
The latest data and analyses point to a slight slowdown in economic growth in 2023 Q4 and 2024 Q1 compared to 2023 Q3, implying an acceleration in annual terms.
Thus, compared to the Q3 average, in the first two months of 2023 Q4, the annual growth of retail sales and services to households witnessed a re-acceleration. At the same time, industrial output reported a lower year-on-year contraction, whereas the volume of construction works continued to expand at a two-digit annual rate, on account of developments in civil engineering works.
However, the annual nominal change in the imports of goods and services rebounded somewhat more substantially in October-November 2023, re-entering positive territory and thus outpacing that of exports. Against this background, after three quarters of contraction, the trade deficit and the current account deficit posted an annual increase, which, in the latter’s case, was strongly amplified by the steep worsening in income balances. Nevertheless, in January-November 2023 overall, both deficits stood markedly below those recorded in the same year-earlier period.
Looking at the labour market, the number of employees economy-wide remained unchanged in October-November too and the ILO unemployment rate stayed broadly flat in 2023 Q4; however, the two-digit annual dynamics of unit labour costs in industry saw a halt in the downward trend posted in the previous six months, spiking in November. The surveys indicate that employment intentions over the very short horizon continued to decline rapidly at the beginning of this year, while the labour shortage reported by companies widened very mildly, after the significant drop in 2023 Q4, and solely on account of developments in the services sector.
The main interbank money market rates posted mild declines in January 2024 as well, after a brief period of stability, while medium- and long-term yields on government securities re-embarked and stayed on a slightly upward path until the closing 10-day period of January, relatively in line with developments in advanced economies and in the region.
This occurred amid a new revision of investor expectations on the outlook for the Fed’s interest rate, with an impact on global risk appetite as well. Against this background, the EUR/RON exchange rate witnessed an upward adjustment in mid-January 2024, albeit more modest than those seen in the region, and then tended to stabilise at the new readings. The leu weakened slightly also in relation to the US dollar, which recovered during January the ground lost in December on international financial markets.
The annual growth rate of credit to the private sector stepped up somewhat more obviously in December 2023, to 6.4 percent from 5.4 percent in November, given the further acceleration of the pace of increase of the domestic currency component, but also amid the slower decline in the dynamics of foreign currency credit, reflecting primarily the developments in loans to non-financial corporations. The share of leu-denominated loans in credit to the private sector narrowed marginally in December 2023, to 68.4 percent from 68.5 percent in November.
In today’s meeting, the BNR Board examined and approved the February 2024 Inflation Report, which incorporates the latest available data and information.
The updated forecast reconfirms the outlook for the annual inflation rate to pick up at the onset of 2024 – under the impact of the increase and introduction of some indirect taxes and charges –, before resuming its decline, although at a slower pace compared to 2023 and to the earlier forecast. Specifically, after probably climbing in January to a level visibly lower than previously projected, the annual inflation rate is expected to go down in December 2024 close to the forecasted value and to reach the upper bound of the variation band of the target at end-2025.
The decrease will continue to be driven by supply-side factors, mainly disinflationary base effects and downward adjustments in commodity prices, alongside the influences expected to come from the deceleration in import price dynamics and the decrease in short-term inflation expectations, as well as from the further contraction of excess aggregate demand, albeit much slower than in the previous projection.
Significant uncertainties and risks are further associated with the future fiscal and income policy stance, coming from the public sector wage dynamics and the full impact of the new law on pensions, but also from the additional fiscal and budgetary measures that might be implemented in the future to carry on budget consolidation, inter alia amid the excessive deficit procedure and the conditionalities attached to other agreements signed with the EC.
Uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, also continue to arise, nevertheless, from the war in Ukraine and the Middle East conflict, as well as from the economic performance in Europe, particularly in Germany.
Furthermore, the absorption of EU funds, especially those under the Next Generation EU programme, is conditional on fulfilling strict milestones and targets. However, this is essential for carrying out the necessary structural reforms, energy transition included, as well as for counterbalancing, at least in part, the contractionary impact exerted by geopolitical conflicts and by the tighter economic and financial conditions worldwide.
The ECB’s and the Fed’s prospective monetary policy stances are also relevant, as well as the conduct of central banks in the region.
In the meeting held today, 13 February 2024, based on the currently available data and assessments, as well as in light of the elevated uncertainty, the BNR Board decided to keep the monetary policy rate at 7.00 percent per annum. Moreover, it decided to leave unchanged the lending (Lombard) facility rate at 8.00 percent per annum and the deposit facility rate at 6.00 percent per annum. Furthermore, the BNR Board decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The BNR Board decisions aim to bring 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 inflation expectations over the medium term, in a manner conducive to achieving sustainable economic growth. At the current juncture, the balanced macroeconomic policy mix and the implementation of structural reforms, also 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 BNR closely monitors developments in the domestic and international environment and will continue to use the tools at its disposal to achieve the fundamental objective of price stability in the medium term.
The new quarterly Inflation Report will be presented to the public in a press conference on 15 February 2024 at 11:00 a.m. The account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the BNR’s website on 23 February 2024 at 3:00 p.m.
The next monetary policy meeting of the BNR Board will be held on 4 April 2024.