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NBR Board decisions on monetary policy
In its meeting of 13 May 2024, the Board of the National Bank of Romania 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 12-month inflation rate fell to 6.61 percent in March 2024 from 7.23 percent in February, mainly following the slowdown in the growth rate of food prices.
Thus, in March the annual inflation rate returned to the level seen at end-2023, as the impact of the increases in the dynamics of electricity, fuel and tobacco product prices in 2024 Q1 overall was counterbalanced by the deceleration of core inflation and the decline in the dynamics of VFE prices.
The annual adjusted CORE2 inflation rate continued to decrease in the first three months of 2024, albeit at a slower pace than in the previous two quarters, falling to 7.1 percent in March 2024, from 8.4 percent in December 2023. Behind the deceleration stood, during this period as well, disinflationary base effects, corrections of agri-food commodity prices and the measure to cap the mark-ups on basic food products, alongside the decreasing dynamics of import prices. The impact of these factors was mitigated by the effects of the fiscal measures implemented at the beginning of this year and by higher short-term inflation expectations. To these added the influences exerted by wage cost increases that occurred towards the end of last year, which were passed through, at least in part, into the prices of some services and non-food items, inter alia amid the rebound in private consumption.
The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 6.7 percent in March 2024 from 7.0 percent in December 2023. Moreover, the average annual CPI inflation rate dropped to 8.5 percent in March 2024, from 10.4 percent in December 2023. In turn, the average annual HICP inflation rate decreased to 8.3 percent in March 2024 from 9.7 percent in December 2023.
The new statistical data reconfirm the 0.5 percent contraction in economic activity in 2023 Q4 against the previous quarter, but also the advance in its annual dynamics to 3.0 percent from 1.9 percent in 2023 Q3.
Based on the new data, the pick-up in the annual growth rate of GDP owed to all domestic demand components, but especially to gross fixed capital formation, whose two-digit annual dynamics almost doubled during this quarter to 21.4 percent. Household consumption also made a significant contribution, with its year-on-year increase posting a re-acceleration.
However, the contribution of net exports saw a renewed strong contraction in 2023 Q4, given that the annual change in the import volume of goods and services went 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 posted an annual increase during this period – after three quarters of decline – that in the latter’s case was amplified by the marked worsening of the primary income balance. Nevertheless, in 2023 overall, both deficits narrowed visibly versus 2022, with the current account deficit-to-GDP ratio shrinking to 7.0 percent from 9.2 percent.
The latest data and analyses point to a notable economic growth in the first months of 2024 compared to 2023 Q4, implying however a drop in the annual GDP dynamics during this period, amid divergent developments in aggregate demand components and in major sectors.
Thus, in the first two months of this year, the annual growth rate of retail sales surged, whereas that of motor vehicles and motorcycles sales decreased at a slower pace compared to the previous quarter average. Conversely, industrial output continued to report a year-on-year contraction during this period as a whole, although it posted a mild recovery in February, whereas the volume of construction works declined sharply from the same year-ago period, after six consecutive quarters of double-digit growth. At the same time, the annual dynamics of imports of goods and services continued to outpace those of exports, so that the trade deficit saw a mildly faster annual increase January through February 2024. By contrast, the current account deficit 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.
Looking at the labour market, the incoming data show a visibly slower monthly increase in the number of employees economy-wide in February, as well as a significant drop in the ILO unemployment rate in March, after several quarters of relative stagnation at an average 5.6 percent level. At the same time, the two-digit annual growth rate of the nominal gross wage continued to rise in January-February 2024, while that of unit labour costs in industry decreased only slightly compared to the previous quarter average, remaining very high. Moreover, the surveys indicate that employment intentions rose in April for the third month in a row, mainly on account of trade and services, while the labour shortage reported by companies widened further, albeit more moderately and with a major contribution from construction.
The main interbank money market rates remained stable in April, while long-term yields on government securities rose more steeply, relatively in line with developments in advanced economies and in the region. This occurred amid investors reconsidering the probable path of the Fed’s interest rate, but also following the stronger tensions in the Middle East, that affected the global risk appetite. Against this background, in the second part of April the EUR/RON exchange rate returned to and then stabilised at the higher readings it had temporarily climbed to in January.
The annual growth rate of credit to the private sector fell further in March 2024, albeit at a visibly slower pace, reaching 4.7 percent from 4.9 percent in February, as the new relatively sharp decrease in the dynamics of the foreign currency component during this month was accompanied by the mild acceleration in the rate of increase of domestic currency credit. Against this backdrop, the share of leu-denominated loans in credit to the private sector widened to 68.9 percent in March from 68.7 percent in February.
In today’s meeting, the NBR Board examined and approved the May 2024 Inflation Report, which incorporates the latest available data and information.
The updated forecast sees the annual inflation rate going down further over the following eight quarters much more slowly compared to 2023 and on a somewhat higher path in the short run than that shown in the previous projection. Thus, the annual inflation rate is expected to stand in December 2024 above the previous forecast and to fall only marginally inside the variation band of the target at the end of the projection horizon (March 2026).
The decrease will continue to be driven by supply-side factors, mainly disinflationary base effects and downward adjustments in commodity prices, whose disinflationary action will however weaken progressively and more markedly over the short term than anticipated earlier. To these add the influences expected to come from the deceleration of import price dynamics and from the gradual softening of short-term inflation expectations, as well as from the very slow contraction of excess aggregate demand over the next two years, in line with previous forecasts.
Heightened uncertainties and risks are associated with the fiscal and income policy stance, considering on one hand the budget execution in the first three months of the year, the public sector wage dynamics and the full impact of the new law on pensions, and on the other hand 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. Labour market conditions and wage dynamics in the economy are also a source of sizeable uncertainties and risks.
Nevertheless, uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, also continue to arise 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.
The ECB’s and the Fed’s prospective monetary policy stances, as well as the conduct of central banks in the region, are also relevant.
In the meeting held today, 13 May 2024, based on the currently available data and assessments, as well as in light of the elevated uncertainty, the NBR 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 NBR Board decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The NBR 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 NBR 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 May 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 NBR’s website on 23 May 2024 at 3:00 p.m.
The next monetary policy meeting of the NBR Board will be held on 5 July 2024.