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Minutes of the monetary policy meeting of the National Bank of Romania Board on 13 May 2024
Publishing date: 23 May 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 decisions, based on the data on and analyses of recent macroeconomic developments and the medium-term outlook 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 in March 2024 the annual inflation rate had fallen to 6.61 percent, i.e. a level similar to that seen at end-2023. It was noted that the return to the December 2023 value had owed to the relatively equal opposite effects generated in Q1, on the one hand, by the increases in the dynamics of electricity, fuel and tobacco product prices – amid a base effect, the hikes in excise duties and higher crude oil prices – and, on the other hand, by the deceleration in core inflation and the decline in the dynamics of VFE prices.
It was remarked that the deceleration in adjusted CORE2 inflation had slowed down in the first three months of the year compared to the previous two quarters.
Specifically, its annual rate had fallen to 7.1 percent in March from 8.4 percent in December 2023, given the moderation in disinflation recorded particularly by the food price subgroup, but also by the prices of non-food items and services, the annual dynamics of which were still very high.
In that light, Board members noted the multitude of diverging factors that had affected the behaviour of core inflation in 2024 Q1. It was agreed that the influences stemming from disinflationary base effects, downward adjustments in agri-food commodity prices and the measure to temporarily cap the mark-ups on basic food products had continued to be prevailing, albeit on the wane; to those had added the impact of the slower 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 the higher short-term inflation expectations, as well as the new increases in wage costs recorded towards the end of the previous year, which had been passed through, at least in part, into the prices of some services and goods, inter alia amid the rebound in private consumption.
Against that background, Board members referred to the dynamics of industrial producer prices for consumer goods, which had slowed their downward trend too in the first three months of the year, on account of the change in non-durables prices. At the same time, financial analysts’ longer-term inflation expectations had remained slightly above the variation band of the target at end-Q1, posting however a faster decline in March, while the consumer purchasing power had been further robust in the first two months of the year, amid the continued relatively fast advance in net real wage, several Board members underlined.
As for the cyclical position of the economy, Board members noted that the new provisional version of statistical data had reconfirmed the contraction by 0.5 percent in economic activity in 2023 Q4 versus the previous quarter, which implied a relatively pronounced narrowing of excess aggregate demand over that period.
Conversely, the annual GDP growth had risen to 3.0 percent from 1.9 percent in Q3, the same as in the previous data series, amid the support provided that time round by all domestic demand components, Board members remarked. It was noted that gross fixed capital formation had been the key driver, as its annual growth rate had almost doubled to 21.4 percent, but household consumption had also made a significant contribution, its year-on-year increase posting a re-acceleration.
However, the contribution of net exports had seen a renewed strong contraction in 2023 Q4, given that the annual change in the import volume of goods and services had gone up much more substantially, re-entering positive territory and therefore outpacing that of the export volume. Consequently, the trade deficit and the current account deficit had posted an annual increase during that period – after three quarters of decline – that in the latter’s case had been amplified by the marked worsening of the primary income balance, several Board members pointed out.
Over the near term, Board members agreed that the economy was likely to increase significantly in the first months of 2024 compared to 2023 Q4. That implied a mild rise in excess aggregate demand and its return close to the values previously envisaged, but also a pronounced drop in the annual GDP dynamics over that period, amid divergent developments in aggregate demand components.
Thus, following the assessment of the relevant indicators, it was deemed that in 2024 Q1 the pick-up in private consumption had remained robust, given especially the surge in the annual growth rate of retail sales in the first two months of 2024, whereas the pace of increase of gross fixed capital formation had probably been strongly weakened by the decline reported in January by the volume of construction works. At the same time, net exports could make a larger negative contribution to the annual GDP dynamics, as the change in imports of goods and services had exceeded further that of exports in January-February 2024. Against that backdrop, the trade deficit had seen a mildly faster annual increase during that period overall, but the current account deficit had recorded a significantly slower annual growth, as a result of the improvement in the secondary income balance, on account of inflows of EU funds to the current account, Board members remarked.
Looking at the labour market, Board members pointed out the recent developments and survey outcomes indicating a halt or even a temporary reversal in the market easing seen during 2023 H2. It was shown that the number of employees in the economy had continued to see a monthly rise in January-February 2024, albeit at a slower pace, while the ILO unemployment rate had fallen markedly in March, after several quarters of relative stagnation at an average 5.6 percent level. Moreover, employment intentions over the very short horizon had risen in April for the third month in a row, mainly on account of trade and services, while the labour shortage reported by companies had widened further, albeit more moderately and with a major contribution from construction.
In that context, Board members noted that the double-digit annual dynamics of the average gross nominal wage had continued to rise in January-February 2024, while those of unit labour costs in industry had decreased only slightly compared to the previous quarter average, remaining very high. Board members viewed those developments overall as a reason for concern, considering the potential effects thus exerted on future inflation – through both demand and wage costs –, but also on external competitiveness.
At the same time, it was observed that structural deficiencies in the labour market, but especially 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. However, the downward trend of the inflation rate and the still sluggish dynamics of external demand, but also the higher resort by employers to workers from outside the EU could act in the opposite direction, some Board members deemed. Under the circumstances, the importance of monitoring wage increases in the private sector was reiterated, in the context of wage renegotiations taking place in 2024, at least until March.
Turning to financial conditions, Board members referred to the stability of the main interbank money market rates in the recent period, but also to the significant drop recorded in March by the average lending rate on new business. Mention was also made of the upward path of long-term yields on government securities, which had steepened in April, relatively in line with developments in advanced economies and in the region. That had occurred amid investors reconsidering the probable path of the Fed’s interest rate, but also following the stronger tensions in the Middle East, with an impact on the global risk appetite.
Against that background, in the second part of April the EUR/RON exchange rate had returned to and then had stabilised at the higher readings it had temporarily climbed to in January. In relation to the US dollar, the leu had witnessed an even more visible depreciation, partly corrected afterwards, reflecting inter alia the former’s movements on international financial markets.
Risks to the behaviour of the EUR/RON exchange rate remained elevated, Board members agreed, referring to the twin deficits and to the uncertainties surrounding the fiscal consolidation process, but also to the current geopolitical tensions. It was deemed that, over the near term, the still high relative attractiveness of investments in domestic currency would also nevertheless continue to have a significant influence, inter alia given the policy rate cuts made by central banks in the region.
Moreover, it was observed that the annual growth rate of credit to the private sector had fallen at a visibly slower pace in March 2024, to 4.7 percent from 4.9 percent in February. That had been solely due to developments in loans to non-financial corporations, whereas the dynamics of household credit had picked up further, inter alia amid new consumer loans in domestic currency reaching a historical high.
Against that backdrop, the share of leu-denominated loans in credit to the private sector had widened to 68.9 percent in March from 68.7 percent in February.
As for future macroeconomic developments, Board members showed that the new assessments reconfirmed the outlook for the annual inflation rate to go down over the following eight quarters much more slowly compared to 2023, but also on a somewhat higher path in the short run than that shown in the February projection.
Specifically, the annual inflation rate was expected to decline to 4.9 percent in December 2024, versus the previously-anticipated 4.7 percent, and to fall only marginally inside the variation band of the target at the end of the projection horizon, i.e. to 3.4 percent in March 2026, in line with prior forecasts.
It was noted that the decrease would be driven, in the period ahead as well, primarily by supply-side factors. However, their disinflationary action would weaken progressively and more markedly over the short term than anticipated earlier, Board members deemed. They referred to the softening influences expected from base effects and from downward corrections of agri-food commodity prices, but also to the relatively higher dynamics anticipated in the fuels and tobacco products segments over the following quarters. Moreover, it was agreed that the evolution of crude oil and other commodity prices remained a source of inflationary risks, at least in the short run, especially amid geopolitical tensions.
At the same time, it was observed that underlying inflationary pressures would probably persist and abate only slightly on the forecast horizon, as previously anticipated, given the prospects for a very slow contraction of excess aggregate demand over the next eight quarters and its remaining significant at the end of the two-year period. Furthermore, the increase in unit labour cost was expected to moderate only mildly during the current year, remaining visibly more alert, while its pass-through, at least in part, into consumer prices could be fostered by consumer demand conditions in various segments, according to several Board members.
Core inflation would nevertheless also reflect the sizeable disinflationary influences, albeit on the wane or fading out, which would probably continue to stem from base effects and downward corrections of commodity prices, as well as from the measure to cap the mark-ups on basic food products. Moreover, hefty disinflationary effects were envisaged from the gradual downward adjustment of short-term inflation expectations, while moderate ones from the slacker growth rate of import prices, Board members underlined.
Under the circumstances, the annual adjusted CORE2 inflation rate would probably continue to decline at a mildly faster tempo than headline inflation, yet on a slightly higher-than-previously-anticipated path. Specifically, it was seen falling to 5.3 percent in December 2024 and to 3.5 percent at the end of the projection horizon, compared to 5.0 percent and 3.6 percent respectively, indicated in the prior forecast for the same moments in time.
As for the future cyclical position of the economy, Board members showed that, after having decelerated slightly more than expected in 2023, economic growth was anticipated to accelerate progressively in 2024 and 2025, and somewhat more steeply than previously envisaged. The outlook was anticipated to be underpinned by the slowdown in inflation and the gradual recovery of external demand, but especially by the fiscal policy stance and the use of European funds under the Next Generation EU instrument. The prospects made it likely for the positive output gap to narrow very slowly, particularly during 2025, and to remain significant at the end of the forecast horizon, some Board members pointed out.
It was noted that, similarly to previous forecasts, household consumption was anticipated to become again in 2024 and remain in 2025 the main driver of GDP advance, amid the marked increases in wages and social transfers overlapping the inflation rate downtrend, but also given the real interest rates on household loans and deposits.
Gross fixed capital formation would also probably continue to make a sizeable contribution to GDP dynamics. However, its growth rate was expected to decline steeply in 2024-2025, after the marked step-up in 2023, but to stay particularly high from a historical perspective. It was deemed that investment would be further supported by the absorption and use of a large volume of EU funds, albeit diminishing versus 2022-2023, in the context of lingering uncertainty associated with budget programmes and executions, as well as amid geopolitical tensions and the economic developments in Europe.
Conversely, the contribution of net exports was expected to become again significantly more contractionary in 2024 than previously anticipated, with a further negative contribution to GDP dynamics in 2025, amid the relatively faster revival of domestic absorption. Against that background, the current account deficit-to-GDP ratio would probably slow its downward correction markedly in 2024-2025 and hence stay well above European standards, remaining a major vulnerability and further inducing risks to inflation, the sovereign risk premium and, ultimately, to economic growth sustainability, Board members underlined.
At the same time, it was shown that heightened uncertainties and risks were associated with the fiscal and income policy stance, stemming in 2024 from the outcome of the budget execution in the first months of the year, the public sector wage dynamics and the full impact of the new law on pensions. Beyond that horizon, heightened risks were however linked to the fiscal and budgetary measures that might be implemented to carry out the fiscal correction and 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.
Uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, also continued to arise from the war in Ukraine and the Middle East conflict, as well as from the economic performance in Europe, particularly in Germany, Board members agreed.
Also from that perspective, Board members underscored again the importance of keeping the fast absorption of EU funds and the efficient use thereof, including those under the Next Generation EU programme, which were deemed 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.