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, 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 decision, based on the data and analyses on current and future macroeconomic, financial and monetary developments 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 posted a faster-than-expected decrease in the first two months of 2023 Q4, falling to 6.72 percent in November, from 8.83 percent in September, under the impact of new significant slowdowns in the dynamics of food and energy prices, as well as following the decline in fuel prices, amid lower crude oil prices.
In turn, the annual adjusted CORE2 inflation rate had seen its downward trend steepen more than anticipated, shrinking to 9.1 percent in November, from 11.3 percent in September, against the background of a further relatively fast deceleration in the growth rate of processed food prices, but also as a result of the falling dynamics of non-food prices and services prices over that period, after an almost continuous upward trend for more than two years, Board members noted.
Following the analysis, it was agreed that the recent deceleration in 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 also from the slower dynamics of import prices. The resulting influences had been only slightly mitigated by those coming from the pass-through into consumer prices of higher costs triggered by the increase in the minimum wage level, amid the resilience of demand in certain segments, some Board members pointed out.
At the same time, it was noted that the annual dynamics of industrial producer prices for consumer goods on the domestic market had continued to decrease at a relatively fast pace October through November, but economic agents’ short-term inflation expectations had either stopped their downward adjustment or had risen in November-December, while financial analysts’ longer-term inflation expectations had moved slightly away from the variation band of the target. Furthermore, the consumer purchasing power had seen a stronger recovery in October, reflecting the surge in the annual dynamics of net real wage, due mainly to the hike in the gross minimum wage economy-wide and to the swifter decrease in the annual inflation rate, some Board members emphasised.
As for the cyclical position of the economy, Board members showed that economic growth had slowed down significantly in 2023 Q3, to 0.9 percent from 1.6 percent in the previous quarter, yet to a lower extent than anticipated, which made it likely for excess aggregate demand to narrow more moderately over that period compared to expectations.
Moreover, it was observed that behind the annual dynamics of GDP remaining modest in Q3 from a historical perspective – 1.1 percent versus 1.0 percent in Q2 – stood the increase in the already very large contractionary impact of the change in inventories and the contribution of general government consumption, which had become slightly negative over that period, while gross fixed capital formation had seen a re-acceleration in its annual growth to double-digit readings and private consumption had posted an annual pick-up after the stagnation in the previous quarter. At the same time, net exports had continued to exert a larger expansionary impact, given the further widening during that period too of the positive differential between the annual 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 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 the previous quarter, given the slower pace of improvement in the primary income balance, on account of reinvested earnings, Board members remarked.
Looking at the labour market, Board members underlined the signs pointing to a mild easing of labour market tensions as indicated by the latest data and surveys, showing that the number of employees economy-wide had stopped its monthly increase in September-October and that the steady job vacancy rate in Q3, after its plunge in the previous three months, had been associated with a relative stability of the ILO unemployment rate, which had persisted into the first two months of Q4 too. Additionally, employment intentions over the very short horizon had declined at a faster pace in 2023 Q4, while the labour shortage reported by companies had narrowed significantly, largely reversing the rise seen in the previous quarter.
At the same time, it was noted that the double-digit annual dynamics of the average gross nominal wage had increased at a slower pace in Q3 too, posting however a re-acceleration in October, under the impact of the hike in the gross minimum wage, while the annual growth rate of unit labour costs had continued to decline slowly in industry in July-October and had witnessed a drop in Q3 in the economy as a whole. ULC dynamics remained, however, particularly high and a matter of concern from the perspective of inflation, considering also their likely short-lived re-acceleration over the near-term horizon, amid the recent rise in the minimum wage economy-wide and across some sectors, Board members underlined.
Furthermore, additional pressures on wage costs in the private sector could stem, in the short run, from the persistence of mismatches between labour demand and supply in some segments, in the context, inter alia, of structural labour market deficiencies, as well as from the wage dynamics in the public sector, according to several Board members. It was agreed, however, that opposite effects were expected from firms’ elevated costs and tighter financial conditions, the downward trend of the inflation rate and the weaker domestic and external demand, but also from the higher resort by employers to workers from outside the EU. Moreover, the potential additional increases in wage costs could be more visibly absorbed in profit margins, given the more cautious consumer behaviour, some Board members reiterated. It was deemed that also relevant for the evolution of labour market conditions were the implications of the fiscal measures implemented in order to continue budget consolidation, but also some firms’ tendency to enhance investment in equipment to compensate for the labour shortage.
Turning to financial conditions, Board members showed that the main interbank money market rates had posted new slight declines in the first part of November 2023, before remaining relatively stable, while yields on government securities had risen abruptly in mid-Q4, but had resumed and steepened their decrease afterwards, in line with developments in advanced economies and in the region. That had occurred amid investors’ revised expectations on the timing of the Fed’s decision to start the interest rate cutting cycle, with an impact on global risk appetite as well.
Against that background, but also given the still high relative attractiveness of investments in domestic currency, the EUR/RON exchange rate had remained fairly stable in November and December as well. Moreover, in relation to the US dollar, the leu had strengthened during both months, as a result of the former’s gradual weakening on international financial markets in that period.
Risks to the behaviour of the EUR/RON exchange rate remained elevated, Board members deemed, referring to the still considerable size of the external disequilibrium and the high uncertainties associated with fiscal consolidation, as well as to the current geopolitical tensions.
At the same time, it was noticed that the annual growth rate of credit to the private sector had halted its downtrend seen in the previous five quarters, posting mild pick-ups in October and November, to reach 5.4 percent from 4.5 percent in September, as the new sizeable declines during that period in the dynamics of the foreign currency component had been more than offset by the re-acceleration of the pace of increase of credit in lei. Therefore, the share of leu-denominated loans in credit to the private sector had resumed its advance, climbing to 68.5 percent in November from 68.1 percent in September.
As for future developments, Board members pointed out that the new assessments reconfirmed the previous forecasts on very short-term inflation behaviour. Specifically, they showed that the annual inflation rate was expected to go up in January 2024 and then resume its gradual decline, on a lower path than that indicated in the November 2023 medium-term projection, which had seen it fall to 7.5 percent in December 2023, to 4.8 percent in December 2024 and to 3.3 percent at the end of the forecast horizon.
It was noted that the near-term inflation outlook continued to be mostly attributable to supply-side factors, as the January 2024 step-up was driven by the increase and introduction of some indirect taxes and charges aimed at furthering budget consolidation, while the subsequent fall in the inflation rate, on a relatively lower trajectory, was primarily due to disinflationary base effects and downward corrections, beyond expectations in the recent period, of agri-food commodity prices and crude oil prices, alongside the decreasing dynamics of import prices.
Uncertainties and risks to the inflation outlook stemmed, however, from the full package of fiscal and budgetary measures implemented recently for underpinning the budget consolidation process, as well as from the measure to cap the mark-ups on basic food products due to end in February 2024, according to Board members.
At the same time, it was agreed that the cyclical position of the economy was expected to exert more modest inflationary pressures than in the prior forecast, albeit easing more gradually over the near-term horizon, as the new assessments indicated for 2023 Q4 and 2024 Q1 overall a more solid-than-previously-projected economic growth, whose quarterly pace would slow down slightly versus 2023 Q3. Under the circumstances, the positive output gap would probably narrow somewhat more moderately during that period than previously anticipated, while the annual GDP dynamics would exceed those forecasted in November 2023, Board members remarked.
Moreover, it was observed that, according to high-frequency indicators, private consumption had become again in 2023 Q4 the main driver of economic growth in annual terms. However, a new positive contribution could also come from gross fixed capital formation, largely due to construction, as well as from net exports, albeit much smaller, as the annual dynamics of exports of goods and services had further exceeded in October those of imports, but to a markedly lower extent. Against that background, the trade deficit had seen a significantly slower annual contraction during the first month of Q4, while the current account deficit had widened considerably – under the influence of the steep worsening in the primary income balance –, remaining nevertheless in January-October overall visibly below that recorded in the same year-earlier period, several Board members pointed out.
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 below-expectations economic performance in Europe, especially in Germany, amid the tightened financial conditions and the external demand dynamics, Board members underlined.
Also from that perspective, Board members insisted again on the importance of absorbing and effectively using EU funds, especially those under the Next Generation EU programme, which were essential for carrying out the necessary structural reforms, energy transition included, but also for counterbalancing, at least in part, the contractionary impact exerted by geopolitical conflicts, as well as for raising the growth potential and strengthening the resilience of Romania’s economy.
Heightened uncertainties and risks to the forecasts stemmed, nevertheless, from the future fiscal and income policy stance, Board members agreed. They referred to the characteristics of the 2023 budget execution and to the coordinates of the budget programme approved for 2024, as well as to the implications of the new legislation on pensions and the wage dynamics in the public sector, which could call for prospective add-ons to the package of corrective fiscal and budgetary measures, amid, inter alia, the excessive deficit procedure and the conditionalities attached to other agreements signed with the EC.
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 the tools at its disposal in order to achieve the fundamental 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.