Banca Naţională a României

The annual inflation rate 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, amid the continued slowdown in the growth rate of food and energy prices, as well as following the decline in fuel prices, under the impact of lower crude oil prices.

At the same time, the annual adjusted CORE2 inflation rate saw its downward trend steepen more than anticipated, shrinking to 9.1 percent in November, from 11.3 percent in September, against the background of more widespread disinflationary base effects, ebbing agri-food commodity prices and the measure to cap the mark-ups on basic food products, but also in the context of the slower dynamics of import prices.

The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 6.9 percent in November, from 9.2 percent in September 2023. Furthermore, the average annual CPI inflation rate and the average HICP inflation rate fell to 11.2 percent and 10.3 percent respectively in November, from 12.6 percent and 11.4 percent respectively in September.

Economic growth slowed down significantly in 2023 Q3, to 0.9 percent from 1.6 percent in the previous three months (quarterly change), yet to a lower extent than anticipated, which makes it likely for excess aggregate demand to narrow more moderately over this period compared to expectations.

In comparison to the same year-ago period, GDP growth rose marginally in Q3, to 1.1 percent from 1.0 percent in Q2, thus remaining modest from a historical perspective, as the change in inventories increased its already very strong contractionary impact, and the contribution of general government consumption became slightly negative. However, gross fixed capital formation saw a re-acceleration in its annual growth to double-digit readings in 2023 Q3, while household consumption posted an annual pick-up after the stagnation in the previous quarter. At the same time, net exports continued to exert a larger expansionary impact, given the further widening of the positive differential between the 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 saw a renewed slightly faster annual decline, whereas the current account deficit 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 in Q3, on account of reinvested earnings.

The latest data and analyses point to a mild slowdown in the quarterly growth rate of GDP in 2023 Q4, implying, however, a more robust annual economic growth over this period than previously forecasted.

Thus, compared to the Q3 average, in October 2023 the annual positive dynamics of retail sales and services to households saw a re-acceleration, while the still strong annual growth rate of motor vehicles and motorcycles sales decreased at a visibly slower pace. At the same time, industrial output reported a markedly lower year-on-year contraction, whereas the volume of construction works continued to expand at a two-digit annual rate, albeit slower than in Q3. Moreover, the annual nominal change in the exports of goods and services exceeded further that of imports, although to a considerably lower extent than in the previous quarters. Against that background, the trade deficit saw a significantly slower annual decline in October, whereas the current account deficit posted a notable rise, as a result of the steep worsening in the primary income balance, narrowing, however, further for the first ten months of the year, overall.

Looking at the labour market, recent data show a halt in the monthly increase in the number of employees economy-wide in September-October and a relative stability of the ILO unemployment rate including in November, alongside a further slight downward trend in October in the annual dynamics of unit labour costs in industry, that remain however at a particularly high two-digit level. The surveys indicate that employment intentions over the very short horizon declined at a faster pace in 2023 Q4, while the labour shortage reported by companies narrowed significantly, largely reversing the rise seen in the previous quarter on account of developments in industry and services.

The main interbank money market rates posted new slight declines in the first part of November 2023, before remaining relatively stable, while yields on government securities rose abruptly in mid-Q4, but resumed and steepened their decrease afterwards, in line with developments in advanced economies and in the region. This 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 this background, but also given the still high relative attractiveness of investments in domestic currency, the EUR/RON exchange rate remained fairly stable in November and December as well. In relation to the US dollar, the leu strengthened during both months, as a result of the former’s gradual weakening on international financial markets in this period.

The annual growth rate of credit to the private sector halted its downtrend at the onset of 2023 Q4, posting mild pick-ups in October and November, to reach 5.4 percent from 4.5 percent in September, as the new sizeable declines in the dynamics of the foreign currency component were 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 resumed its advance, to 68.5 percent in November from 68.1 percent in September.

According to current assessments, the annual inflation rate will go up in January 2024 and then resume its gradual decline, on a lower path than that shown in the November 2023 medium-term forecast. The step-up will be driven by the increase and introduction in January of some indirect taxes and charges aimed at furthering budget consolidation. Behind the subsequent fall in the inflation rate will further stand primarily supply-side factors – especially disinflationary base effects and downward corrections of agri-food commodity prices and crude oil prices –, as well as the decreasing dynamics of import prices.

Uncertainties and risks to the inflation outlook stem, 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.

Significant uncertainties and risks are associated with the future fiscal and income policy stance, given the 2023 budget execution and the coordinates of the budget programme approved for 2024, as well as 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, inter alia amid the excessive deficit procedure and the conditionalities attached to other agreements signed with the EC.

Uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, continue 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. 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 and by the tightening of economic and financial conditions worldwide.

Also relevant are the ECB’s and the Fed’s prospective monetary policy stances, as well as the conduct of central banks in the region.

In the meeting held today, 12 January 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 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 25 January 2024 at 3:00 p.m.

In line with the announced calendar, the next monetary policy meeting of the NBR Board will be held on 13 February 2024.