In its meeting of 5 July 2023, the Board of the National Bank of Romania decided:
- to keep the monetary policy rate at 7.00 percent per annum;
- 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;
- to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The annual inflation rate saw a faster decline in the first two months of Q2, falling from 14.53 percent in March to 10.64 percent in May, in line with the forecasts, mainly as a result of the stronger downward trend in energy and fuel price dynamics, under the impact of some base effects, lower crude oil prices and capping schemes for electricity and natural gas prices.
At the same time, the annual adjusted CORE2 inflation rate continued to decrease gradually during this period, in line with expectations, and reached 13.6 percent in May from 14.6 percent in March amid stronger disinflationary base effects, falling prices of commodities, primarily agri-food items, as well as the downward adjustment of short-term inflation expectations. The impact of these factors surpassed the opposite influences that continued to come from the gradual pass-through of increased costs of firms, including wage costs, into consumer prices, as well as from the preserved profit margins, in the context of a still robust consumer demand.
The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 9.6 percent in May from 12.1 percent in March 2023. Furthermore, the average annual CPI inflation rate and the average HICP inflation rate went down to 14.7 percent and 12.8 percent respectively in May from 15.3 percent and 13.2 percent respectively in March, remaining below the levels prevailing in the region and the Baltic countries.
Economic growth saw a faster-than-expected slowdown in 2023 Q1, to 0.1 percent from 1.0 percent in the previous three months (quarterly change), which makes it likely for excess aggregate demand to narrow somewhat more visibly over this period, compared to expectations.
At the same time, in 2023 Q1 the annual growth rate of GDP shrank faster than forecasted to 2.3 percent from 4.5 percent in 2022 Q4. Behind this decline stood mainly the change in inventories, while the annual rates of increase of household consumption and gross fixed capital formation continued to step up and the contractionary impact of net exports posted a relatively modest widening, as the slowdown in the dynamics of the export volume slightly outpaced that in the dynamics of the import volume of goods and services. Trade deficit and current account deficit recorded, however, significant decreases in 2023 Q1 versus 2022 Q1 mainly amid the improved terms of trade.
The latest data and analyses point to a slower economic growth in Q2 than previously forecasted, implying a further drop in its annual dynamics, under the influence of a base effect.
Thus, in the first month of Q2, retail sales posted a decrease versus the same year-ago period for the first time in almost three years, while growth in services to households saw a faster deceleration. At the same time, industrial output witnessed a larger contraction in annual terms, whereas the annual increase in the volume of construction works continued to lose momentum. However, the annual growth rate of exports was again visibly higher in April than that of imports of goods and services, which saw a much steeper decline, mainly as a result of the improved terms of trade. Thus, trade deficit and current account deficit recorded a more pronounced annual decline in April 2023, inter alia due to the higher services surplus.
Looking at the labour market, recent data show a reacceleration of the increase in the number of employees economy-wide in March-April, as well as a relative stability of the ILO unemployment rate in April-May, after its decline to 5.5 percent in Q1, alongside a steeper upward trend in early Q2 in the particularly high annual dynamics of unit labour costs in industry. At the same time, the surveys indicate a swifter rise in employment intentions in the near future, but also a stronger decline in April-June in the labour shortage reported by companies.
The main interbank money market rates halted their descending path in mid-May, while yields on government securities continued to decrease gradually until towards end-June, reflecting the higher relative attractiveness of investments in domestic currency, especially due to the steeper decline in the annual inflation rate and to the reconfirmation of its anticipated downward trajectory.
The EUR/RON exchange rate shifted in mid-May and then stuck to slightly higher readings than those prevailing in the first part of 2022, inter alia amid the revision of investor expectations on the near-term prospect of the Fed’s monetary policy stance.
The annual growth rate of credit to the private sector resumed a mildly faster decrease in the first two months of Q2, reaching 7.8 percent in May from 10.2 percent in March, as the dynamics of the leu-denominated component continued to decelerate swiftly and the particularly high rate of change of foreign currency loans halted its upward path, posting successive declines in April and May. Therefore, the share of leu-denominated loans in credit to the private sector saw its downtrend moderate considerably, diminishing only marginally, to 67.6 percent in May from 67.8 percent in March.
According to current assessments, the annual inflation rate will continue to fall over the following months, in line with the latest medium-term forecast (May 2023), primarily under the influence of base effects and the downward corrections of some commodity prices in previous quarters.
Uncertainties and risks surrounding the outlook stem, however, from the measure to cap temporarily the mark-ups on basic food products and from additional oil supply cuts announced by OPEC countries.
At the same time, the war in Ukraine and the related sanctions continue to generate significant uncertainties and risks to the outlook for economic activity, hence to medium-term inflation developments, while the absorption of EU funds, especially those under the Next Generation EU programme, is conditional on fulfilling strict milestones and targets for implementing the projects. However, it is essential for carrying out the necessary structural reforms, energy transition included, as well as for counterbalancing, at least in part, the contractionary impact of supply-side shocks, compounded also by the tightening of economic and financial conditions worldwide.
Heightened uncertainties and risks are associated with the fiscal and income policy stance, given the characteristics of the budget execution in the first five months of the year, as well as the recent or potential pay rises in the public sector, but also the fiscal measures that could be implemented in order to continue budget consolidation in line with the commitments under the excessive deficit procedure.
The Fed’s and the ECB’s monetary policy decisions, as well as the stance of central banks in the region continue to be relevant.
In the meeting held today, 5 July 2023, based on the currently available data and assessments, as well as in light of the very 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 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 17 July 2023 at 3:00 p.m.
In line with the announced calendar, the next monetary policy meeting of the NBR Board will be held on 7 August 2023.