The National Bank of Romania Board members present at the meeting: Mugur Isărescu, 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 Nicolăescu, 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 Rușanu, 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 December 2023 the annual inflation rate had fallen to 6.61 percent, i.e. below the forecast, thus shedding 9.76 percentage points from the end of 2022. Processed food prices and energy prices had made the major, almost equal contributions to that decline, Board members noted, while highlighting the additional disinflationary influences, albeit much more modest, stemming from the VFE and fuels segments, but also the small opposite effects generated in 2023 by the non-food and market services sub-components of core inflation.
It was noted that in 2023 Q4 the annual inflation rate had decreased at a faster-than-anticipated pace, after having declined to 8.83 percent in September, given that the dynamics of food prices and energy prices had continued to decelerate at a relatively swift tempo, while the faster growth rate posted during that period by the fuel prices on account of a base effect had been fully counterbalanced, in terms of impact, by the slowdown in the growth rates of administered prices and tobacco product prices.
In turn, the annual adjusted CORE2 inflation rate had seen its downward trend steepen more than anticipated in 2023 Q4, going down to 8.4 percent in December, from 11.3 percent in September, following the notable, albeit on the wane, disinflationary influence from processed food prices, but also as a result of the falling price dynamics of non-food and services sub-components over that period, after an almost continuous upward trend for more than two years, Board members underlined.
Following the analysis, it was agreed that the recent behaviour of core inflation had stemmed mainly from more widespread disinflationary base effects, downward adjustments in agri-food commodity prices and the measure to cap temporarily the mark-ups on basic food products, but had also reflected the influences of moderating consumer demand and slower dynamics of import prices. The action of those factors had been only to a low extent mitigated by the pass-through into some services prices of higher costs triggered by the hike in the minimum gross wage in 2023 Q4, as well as by the temporary worsening of economic agents’ short-term inflation expectations, several Board members remarked.
At the same time, it was noted that the dynamics of industrial producer prices for consumer goods on the domestic market had continued to decrease considerably in 2023 Q4, but financial analysts’ longer-term inflation expectations had undergone a slight upward re-adjustment in November 2023-January 2024, thus strengthening above the variation band of the target. Moreover, the growth of net real wage had re-accelerated in the first two months of 2023 Q4, inter alia amid a swifter decrease in the annual inflation rate, boosting the recovery of consumer purchasing power, several Board members pointed out.
As for the cyclical position of the economy, Board members showed that the new provisional version of statistical data reconfirmed the significant, yet smaller-than-expected, slowdown in economic growth in 2023 Q3 – to 0.9 percent from 1.5 percent in the previous three months –, which implied a relatively moderate narrowing of excess aggregate demand over that period.
The annual GDP growth rate was also reconfirmed to have remained modest from a historical perspective in 2023 Q3 – at 1.1 percent versus 1.0 percent in Q2 –, given the stronger contractionary impact of the change in inventories and the drop in general government consumption, whereas gross fixed capital formation had seen a re-acceleration in its annual growth to double-digit readings and household consumption had posted a renewed faster pick-up, Board members noted. At the same time, net exports had continued to exert a larger expansionary impact, given the further widening during Q3 of the positive differential between the dynamics of exports of goods and services, in terms of volume, and those of imports. Consequently, the trade deficit had seen a renewed slightly faster annual decline, whereas the current account deficit had 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, several Board members underlined.
For the period ahead, Board members agreed that economic growth was likely to witness a subdued slowdown in 2023 Q4 and 2024 Q1 versus 2023 Q3, which implied a moderate narrowing of excess aggregate demand over that period, but also higher levels of annual GDP growth.
It was noted that high-frequency indicators pointed to the sizeable contribution of private consumption to the annual economic growth in 2023 Q4, but also to a further significant contribution of gross fixed capital formation, largely on account of developments in civil engineering works. However, the contribution of net exports had become again probably slightly negative, as the annual change in the imports of goods and services had rebounded somewhat more substantially in October-November 2023, re-entering positive territory and outpacing that of exports. Against that background, the trade deficit and the current account deficit had posted an annual increase – after three quarters of contraction –, which, in the latter’s case, had been strongly amplified by the worsening in income balances. Nevertheless, in January-November 2023 overall, both deficits had stood markedly below those recorded in the same year-earlier period, some Board members pointed out.
Looking at the labour market, Board members assessed that market tensions were still high but slightly subsiding, as they referred to the unchanged number of employees economy-wide October through November 2023 and the relative stability of the ILO unemployment rate, as well as to the sharp weakening, in the past four months, of employment intentions over the very short horizon. At the same time, it was remarked that the very mild increase in the labour shortage reported by companies in January 2024 had occurred after a significant drop in 2023 Q4 and solely on account of developments in the services sector.
However, the pace of increase of labour costs remained particularly fast and a matter of concern from the perspective of inflation, but also of external competitiveness, the Board members pointed out, noting that the double-digit annual dynamics of the average gross nominal wage earnings had posted a renewed acceleration in the first two months of 2023 Q4 – mainly under the impact of the hike in the gross minimum wage – and that the growth rate of unit labour costs in industry had seen a relatively steep rise in November, inter alia as a result of increased labour productivity losses.
At the same time, it was shown that structural deficiencies in the labour market and the public sector wage dynamics could further pose higher pressures on wage costs in the private sector in the future. 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, would likely act in the opposite direction, several Board members deemed. From that perspective, the wage increases resulting from the renegotiations in the first months of 2024 would be particularly relevant, Board members agreed.
Turning to financial conditions, Board members referred to the main interbank money market rates, which had posted mild declines in January 2024 as well, while medium- and long-term yields on government securities had 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. That had 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 that background, the EUR/RON exchange rate had witnessed an upward adjustment in mid-January 2024, albeit more modest than those seen in the region, and had then tended to stabilise somewhat at the new readings. The leu had weakened only slightly also in relation to the US dollar, which had tended to strengthen after the ground lost in December on international financial markets. Risks to the behaviour of the EUR/RON exchange rate remained however elevated, Board members deemed, referring to the still considerable size of the external disequilibrium and the uncertainties associated with fiscal consolidation, as well as to the outlook for major central banks’ key rates and to the current geopolitical tensions.
At the same time, it was noticed that the annual growth rate of credit to the private sector had steepened its upward path in December 2023 versus the previous two months, 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 had narrowed marginally in December 2023, to 68.4 percent from 68.5 percent in November.
As for future macroeconomic developments, Board members showed that the new assessments reconfirmed the outlook for the annual inflation rate to pick up at the onset of 2024, 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 was expected to go down to 4.7 percent in December 2024, only marginally below the prior forecast, and to drop to 3.5 percent at end-2025 – thus standing at the upper bound of the variation band of the target and above the 3.3 percent level indicated by the earlier projection for September 2025.
Behind the temporary step-up in January 2024 stood primarily the impact exerted by the increase and introduction of some indirect taxes and charges aimed at furthering budget consolidation. The impact was particularly manifest in the fuels and tobacco products segments and to a lower extent in core inflation. However, the overall action of supply-side factors was to become disinflationary again afterwards, but almost exclusively over the short term and with a gradually abating strength, amid the softening influences expected from base effects and downward adjustments of commodity prices, especially of agri-food items, Board members highlighted on several occasions.
At the same time, it was agreed that the balance of risks stemming from supply-side factors remained tilted to the upside both in the short run and over the longer horizon. Members referred to potential direct/indirect effects from the measures underpinning budget consolidation, as well as to uncertainties associated with the capping of the mark-ups on basic food products and of electricity and natural gas prices.
Moreover, underlying inflationary pressures would probably persist throughout the forecast horizon and abate much more gradually than previously anticipated, given the prospects for the very slow contraction of excess aggregate demand and its remaining significant at end-2025, compared with the prior forecast that had seen the output gap enter negative territory in 2024 Q4 already, Board members showed on several occasions. Furthermore, the increase in unit labour costs in the private sector was expected to moderate only mildly during the current year, remaining relatively more alert, while its absorption, at least in part, into firms’ profit margins was conditional on consumer demand in various segments, according to several Board members.
Core inflation was nevertheless anticipated to reflect sizeable disinflationary influences from the decline in short-term inflation expectations, although at a slightly slower pace than in the previous forecast, as well as moderate ones from the slacker growth rate of import prices. Significant disinflationary influences, albeit on the wane or fading out, would probably stem also from base effects and the downward adjustments of some commodity prices. At the same time, the changes in taxes and charges and the removal of some tax breaks were anticipated to slow down in the short run the decrease in core inflation dynamics, Board members underlined.
Under the circumstances, the annual adjusted CORE2 inflation rate would probably continue to decline gradually, yet at a somewhat faster tempo than headline inflation, falling to 5.0 percent in December 2024 and to 3.6 percent at the end of the projection horizon, compared to the previously-anticipated 5.2 percent and 3.4 percent respectively.
As for the future cyclical position of the economy, Board members showed that its underlying premises were based on the probable deceleration slightly below expectations of GDP dynamics in 2023, but especially on the prospects for a more pronounced acceleration of economic growth in 2024 and 2025 than in previous forecasts. The outlook was anticipated to be underpinned by the slowdown in inflation and the recovery of external demand, as well as by the fiscal policy stance amid the new law on pensions and by the broader use of European funds under the Next Generation EU instrument. The developments made it likely for the positive output gap to narrow at a much slower pace across the forecast horizon, implying a considerable delay in its closing compared to the previous projection, some Board members pointed out.
It was also noted that, after the abrupt weakening in 2023, household consumption would probably become again the main determinant of GDP advance in 2024 and then consolidate its majority contribution, 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.
By contrast, the growth rate of gross fixed capital formation was expected to decline considerably in 2024-2025 and visibly faster than previously anticipated, remaining however robust and with a sizeable contribution to GDP dynamics. That would reflect the further absorption of a large, albeit diminished volume of EU funds, but also the effects and uncertainty associated with budget programmes and executions, as well as with the economic developments in Europe and geopolitical tensions, Board members remarked.
Moreover, it was observed that the evolution of net exports would probably become slightly contractionary again over the following two years, amid the relatively faster revival of domestic absorption. Board members deemed worrisome the likely marked slowdown, against that background, in the downward correction of the current account deficit as a share of GDP, as well as the implicit stay of the indicator well above European standards, especially in view of potential implications for inflation and the sovereign risk premium.
Significant uncertainties and risks were further associated with the future fiscal and income policy stance, Board members showed on several occasions. They referred in particular to the public sector wage dynamics and the full impact of the new law on pensions. Mention was also made, however, of the fiscal and budgetary measures that might be implemented in the future 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.
At the same time, it was agreed that significant uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, 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.
Also from that perspective, Board members underscored 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. At the same time, it was agreed that a potential confirmation in the months ahead of the return and stay of the annual inflation rate on the envisaged downward path might make it appropriate to start prudently cutting the monetary policy rate, conditional however also on the prevailing uncertainties and risks to the inflation outlook.
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.