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; Leonardo Badea, Vice Chairman of the Board and First Deputy Governor of the National Bank of Romania; Florin Georgescu, Board member and Deputy Governor of the National Bank of Romania; Cosmin Marinescu, Board member and Deputy Governor of the National Bank of Romania; Aura-Gabriela Socol, Board member; Roberta-Alma Anastase, Board member; Alexandru Nazare, Board member; Csaba Bálint, Board member; Cristian Popa, 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 the annual inflation rate had shrunk to 4.62 percent in September from 5.10 percent in August, thus falling below the 4.94 percent level seen in June 2024. It was noted that the decline in Q3 had been lower than that in the previous three months, as well as compared to forecasts, given that the sharp decreases in the dynamics of administered prices and fuel prices during that period – due to base effects and the unexpected drop in crude oil prices – had been largely counterbalanced, in terms of impact, by the hike in food prices and to a low extent by the higher electricity prices, primarily amid the severe drought in 2024.
In turn, the annual adjusted CORE2 inflation rate had slowed its downward trend in Q3, also compared with the forecast, reaching 5.6 percent in September from 5.7 percent in June, amid the re-acceleration in the growth rate of processed food prices and the slower decline in the fast dynamics of services prices, but also against the background of the decrease at a relatively swift pace, similar to that seen in Q2, in the dynamics of non-food prices, which remained however elevated, according to Board members.
Following the assessment, it was agreed that the disinflationary base effects in non-food sub-components and the decrease in import price dynamics had further been the major drivers of the deceleration in core inflation. The influence of those factors had been substantially mitigated in Q3 by the unfavourable statistical effect in the processed food segment and by the hike in some agri-food commodity prices, as well as by higher wage costs passed through, at least in part, into some consumer prices, inter alia amid still high short-term inflation expectations and a robust demand for goods, Board members remarked.
In that context, it was noted that the annual dynamics of industrial producer prices for consumer goods had virtually stopped their downward trend in Q3, also amid the further faster growth of durables prices, while economic agents’ short-term inflation expectations had either continued to pick up slightly in October in certain sectors or had remained at the high levels posted in the previous three months. At the same time, financial analysts’ longer-term inflation expectations had halted their downward adjustment in mid-Q3 and had remained unchanged until October, marginally below the upper bound of the variation band of the target, while the consumer purchasing power had increased at a stronger pace July through August, reflecting the developments in real net wage dynamics, Board members underlined.
As for the cyclical position of the economy, Board members observed that the revised statistical data indicated a 0.3 percent growth in economic activity in 2024 Q2, after a 0.4 percent contraction in the previous three months, implying a more visible narrowing of excess aggregate demand in mid-2024 compared with forecasts.
Household consumption had however displayed a significantly faster rate of increase, including in annual terms, while gross fixed capital formation had had an opposite evolution, and net exports had exerted a notably larger contractionary impact, containing the pick-up in annual GDP growth to 0.9 percent in Q2, after its slowdown to 0.5 percent in the previous quarter, Board members showed.
At the same time, they emphasised the marked advance in the dynamics of trade and current account deficits in Q2 – amid the faster climb in the volume of imports of goods and services, alongside the further decline in the volume of exports –, spurred in the latter case also by the considerable worsening of the secondary income balance, reflecting the lower inflows of EU funds to the current account.
Turning to the near-term outlook, Board members agreed that economic activity was likely to post somewhat more modest quarterly increases in the latter part of 2024 than previously anticipated, yet on a gradual step-up, implying the narrowing of excess aggregate demand to lower levels than the August forecasts, but also a rise in annual GDP dynamics over that period.
It was noted that, according to high-frequency indicators, the annual economic growth had been driven in Q3 too primarily by private consumption, amid the hike in household income, whereas gross fixed capital formation had probably made again a lower positive contribution, mainly on account of construction. The contractionary impact of net exports was however likely to decline mildly, as the annual change in the exports of goods and services had seen the negative differential with that of imports narrow markedly July through August, recording a much more pronounced advance, to a significantly positive level. Against that background, the annual increases in the trade deficit and the current account deficit had slowed down considerably over that period versus the previous quarter, yet had remained particularly fast-paced in the first eight months of 2024, Board members pointed out on several occasions.
Looking at the labour market, Board members assessed that market tensions were still high but slightly subsiding, as they referred to the almost unchanged number of employees economy-wide July through August, alongside the rise in the ILO unemployment rate to 5.5 percent in Q3, after the fall to 5.1 percent in June. Moreover, surveys pointed to a sharp decline in employment intentions over the very short horizon during Q3 and to their stability in October, as well as to a steeper contraction in labour shortage at the beginning of 2024 Q4.
However, the dynamics of wages and labour costs remained very high and a reason for concern from the perspective of inflation, but also of external competitiveness, the Board members deemed on several occasions, pointing out the two-digit annual growth rate of the nominal gross wage and its step-up to 16.8 percent in July-August – mainly under the impact of the new hike in the gross minimum wage economy-wide –, as well as the similar dynamics of unit wage costs in industry, which had climbed to 17.8 percent over the same period.
At the same time, it was agreed that structural deficiencies in the labour market and the public sector wage dynamics, as well as the expected new increase in the gross minimum wage, could pose high pressures, at least in the short term, on wages and labour costs in the private sector. In the opposite direction could act, however, more visibly the relative weakening of demand, particularly external demand, as well as the downward path of the inflation rate, alongside the higher resort by employers to workers from outside the EU, but also to technology integration, several Board members reiterated.
Turning to financial conditions, Board members noted the flat trajectory of the main interbank money market rates in September and October, as well as the shift over that period in long-term yields on government securities, which at the beginning of Q4 had re-embarked and subsequently stayed on a steeply upward course – relatively in line with developments in advanced economies and in the region –, amid investors reconsidering 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 remained broadly stable in October at the higher values it had returned to in mid-Q3. The leu had witnessed, however, a sizeable depreciation versus the US dollar, as the latter had strengthened on international financial markets.
Board members deemed that risks to the behaviour of the leu’s exchange rate were on the rise, referring to the large twin deficits and to the significant uncertainties surrounding the fiscal consolidation process, amid inter alia the electoral context, but also to global economic developments and escalating geopolitical tensions, likely to increase international financial market volatility.
At the same time, it was observed that the annual growth rate of credit to the private sector had picked up further in September, to 8.4 percent from 7.7 percent in August, mainly due to domestic currency loans to non-financial corporations, whose dynamics had continued to step up, even amid the substantial contraction in funds allocated via government programmes. Lending to households had remained intense too, Board members noted, highlighting the particularly high dynamics of leu-denominated consumer credit, as well as their sharp uptrend in 2024 Q1-Q3, correlated with the growth rate of household income. Under the circumstances, the share of the domestic currency component in credit to the private sector had continued to widen, reaching 69.8 percent from 69.7 percent in August.
As for the future macroeconomic developments, Board members showed that the new assessments indicated a worsening of the inflation outlook compared to the previous forecasts, especially over the short term. Specifically, the annual inflation rate was expected to pick up slightly in the closing months of 2024 and to see a marked fluctuation in 2025 H1, thus staying above the variation band of the target and at significantly higher values than previously anticipated. Moreover, the indicator was then seen resuming its decline on a higher path than in the prior projection, dropping no sooner than the onset of 2026 below the upper bound of the variation band of the target and remaining in its vicinity until the end of the forecast horizon. Thus, the annual inflation rate would probably go up to 4.9 percent at end-2024, before decreasing to 3.5 percent in December 2025 and to 3.3 percent at the end of the forecast horizon, compared to 4.0 percent, 3.4 percent and 3.2 percent respectively, as indicated by the prior projection for the same reference periods.
It was observed that the fluctuations and the higher levels of the annual inflation rate in the following three quarters were primarily attributable to two-way base effects – associated inter alia with the legislative changes in the energy field applied in April 2024 –, but also to the severe drought of 2024 and the uptrend in some commodity prices, further affecting food and energy price dynamics. The overall action of supply-side factors would, however, become disinflationary again afterwards, mainly under the impact of base effects that would materialise in the non-food sub-components of core inflation, as well as in the growth rates of administered prices and tobacco product prices, Board members remarked. At the same time, it was noted that fuel price dynamics would probably stay in the short run below the previously-forecasted levels, amid the recent and anticipated developments in crude oil prices.
The balance of risks from supply-side factors was, nevertheless, further tilted to the upside, Board members agreed. They indicated the movements in energy and food prices to be the major sources, given the applicable legislation and the protracted drought of 2024, as well as the path of crude oil and other commodity prices in view of escalating geopolitical tensions.
It was shown that underlying inflationary pressures were expected to be more moderate and easing more swiftly than in the prior forecast, as the positive output gap was seen narrowing progressively in the following six quarters, until almost closing, implicitly to significantly lower-than-previously envisaged values. Over the short horizon, pressures would however remain sizeable, also amid the markedly faster growth of private consumption in H1 and probably during 2024 overall, as well as following the high and above-expectations level recently reached by the double-digit annual dynamics of unit labour costs in the private sector, Board members concluded.
Nevertheless, core inflation would also capture the rising influences of disinflationary base effects in the non-food and services segments, which would outweigh the opposite influences anticipated to stem over the short term from the processed food price dynamics, under the impact of unfavourable statistical effects and of the uptrend in some agri-food commodity prices, Board members remarked.
It was also observed that increasing disinflationary effects over the entire forecast horizon were expected from the deceleration in import price growth, but especially from the decline in short-term inflation expectations, at a slightly slower pace, however, than in the prior projection and from higher-than-previously-anticipated levels.
Under the circumstances, the annual adjusted CORE2 inflation rate would probably continue to decline gradually, on a higher path in the short run than that in the previous projection, but somewhat lower over the second segment of the forecast horizon. Specifically, it was seen falling to 5.1 percent in December 2024, 3.5 percent in the closing month of 2025 and 3.2 percent at the end of the projection horizon, compared to 4.6 percent, 3.5 percent and 3.4 percent respectively, as previously forecasted for the same reference periods.
As for the future cyclical position of the economy, Board members showed that, according to the new assessments, economic growth would see a markedly slower pace in 2024, owing also to the weaker performance of agriculture. It would then recover moderately in 2025, reflecting the revival of external demand, as well as amid the use of European funds under the Next Generation EU instrument, albeit to a lower extent than envisaged earlier. The outlook rendered it likely for the positive output gap to shrink progressively over the following six quarters, until almost closing, and to stay relatively constant afterwards. That implied the excess aggregate demand would decline over the entire forecast horizon to significantly lower-than-previously-projected values, some Board members pointed out.
In partial contrast to those developments, household consumption would probably see a considerable step-up in its dynamics during 2024 overall and would remain the main driver of GDP advance in 2025, amid the particularly swift growth of households’ real disposable income, due to increases in wages and social transfers overlapping the inflation rate downtrend, Board members showed on several occasions.
Conversely, the contribution of gross fixed capital formation to the GDP advance was expected to diminish significantly in 2024-2025, given the marked slowdown in GFCF dynamics during 2024, followed by a re-acceleration in 2025, albeit moderate from a historical perspective, amid the use of a sizeable volume of EU funds, yet on a notable decline versus 2023. Those developments were also anticipated in the context of the uncertainties associated with the budget situation and programmes, as well as economic developments across Europe and geopolitical tensions, Board members remarked.
At the same time, it was observed that the contribution of net exports to GDP growth was foreseen to be much more contractionary in 2024 than previously anticipated, and it would probably stay negative in 2025, amid the brisker rise in the dynamics of the import volume of goods and services compared to those of the export volume, linked with the differential between the rate of change of domestic absorption and that of external demand. Therefore, the current account deficit-to-GDP ratio would go up significantly in 2024-2025 and deviate further from European standards, representing a major vulnerability, via the risks to inflation, the sovereign risk premium and, ultimately, to economic growth sustainability, several Board members underlined.
Significant uncertainties and risks came from the future fiscal and income policy stance, Board members showed, given the fiscal and budgetary measures that might be implemented as of 2025 with a view to placing the budget deficit onto a sustainable downward path in line with the new EU economic governance framework.
It was agreed, moreover, that heightened uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, stemmed from the war in Ukraine and the Middle East conflict, as well as from the economic performance in Europe and globally, also in the context of escalating geopolitical tensions.
From that perspective as well, Board members underscored the importance of absorbing and efficiently using the largest possible volume of EU funds, 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 analysed context overall warranted a policy rate status-quo, with a view to ensuring and maintaining price stability over the medium term, in a manner conducive to achieving sustainable economic growth.
In addition, 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 fundamental objective regarding medium-term price stability, while safeguarding financial stability.
Under the circumstances, the NBR Board unanimously decided to keep the monetary policy rate at 6.50 percent. Moreover, it decided to leave unchanged the lending (Lombard) facility rate at 7.50 percent and the deposit facility rate at 5.50 percent. Furthermore, 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.