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 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 inflation developments, Board members showed that the faster decline in the annual inflation rate in the first two months of 2023 Q2 – to 10.64 percent in May from 14.53 percent in March – had been in line with the forecasts, being the 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.

It was observed that a disinflationary contribution had come that time round also from the adjusted CORE2 inflation, whose annual dynamics had followed the gradual downward path first seen in March, reaching 13.6 percent in May, in line with expectations, from 14.6 percent at end-Q1, amid the strong deceleration in the growth rate of processed food prices. In the non-food segment, but especially in the services segment, the dynamics of prices had however continued to gather momentum during that period too, given new significant monthly hikes in the prices of certain goods and market services, several Board members noted.

Following the analysis, it was agreed that the deceleration in core inflation had stemmed mainly from base effects and the decline in the prices of commodities, primarily agri-food items, as well as from the downward adjustment of short-term inflation expectations. The adjustment had gained speed over the last months, particularly among economic agents in trade, services and construction. The increasingly stronger disinflationary impact of those factors had surpassed the opposite influences that had 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, Board members underlined.

At the same time, Board members observed that the annual dynamics of industrial producer prices for consumer goods on the domestic market had decreased at a faster pace in April-May, mainly following the deceleration in the non-durables price dynamics. Nevertheless, longer-term inflation expectations of financial analysts had seen only a marginal drop in June 2023 against December 2022, thus remaining above the variation band of the target, while the consumer purchasing power had posted a relative recovery in March-April, as the annual growth rate of the average net real wage had returned to positive territory, especially following the decrease in the annual inflation rate, several Board members pointed out.

As for the cyclical position of the economy, Board members showed that economic growth had seen a faster-than-expected slowdown in 2023 Q1, to 0.1 percent from 1.0 percent in the previous three months, which made it likely for excess aggregate demand to narrow somewhat more visibly over that period, compared to expectations.

It was observed that the annual growth rate of GDP had also shrunk faster than forecasted, to 2.3 percent from 4.5 percent in 2022 Q4, but mainly on the back of the change in inventories, while the annual rate of increase of household consumption had continued to step up and the two-digit annual dynamics of gross fixed capital formation had gathered pace again. Moreover, the negative contribution of net exports to GDP growth had posted a relatively modest widening, as the slowdown in the dynamics of the export volume had slightly outpaced that in the dynamics of the import volume of goods and services. Trade deficit and current account deficit had recorded, however, significant decreases in 2023 Q1 versus 2022 Q1 mainly amid the improved terms of trade, Board members noted.

Looking at the labour market, Board members underlined the performance above expectations of its parameters in recent months, showing the reacceleration of the monthly increase in the number of employees economy-wide in March-April, primarily on account of hiring in the private sector, and the relatively stable ILO unemployment rate in April-May after a fall to 5.5 percent in Q1, whereas the job vacancy rate had seen a significant advance. At the same time, employment intentions over the near-term horizon had posted a swifter rise in Q2, getting closer to the higher levels seen in the first part of 2022. Conversely, the labour shortage reported by companies had recorded a stronger decline in April-June, but almost entirely on account of its drop in industry, some Board members remarked.

At the same time, reference was made to the double-digit and rising annual dynamics of the average gross nominal wage in the first months of the current year, as well as to the significant positive level reached in April by the change in the net real wage, mainly amid the decline in the annual inflation rate. A matter of concern was considered especially the particularly fast-paced and steadily accelerating dynamics of unit labour cost – in the economy as a whole, but mostly in industry.

It was deemed that, in the given context, the pressures on wages and labour costs in the private sector could be amplified by the growing skills mismatch, as well as by the new hikes in the public sector, while opposite effects were expected, at least in certain areas, from the high costs of firms, the tighter financial conditions and weaker domestic and foreign demand, as well as from the relatively swift decline in the inflation rate and the prospects for its further fall.

Moreover, Board members reiterated the potential implications on the labour market stemming from the unwinding, in the not too distant future, of government support measures, as well as from the need for technology integration – likely to affect the viability of some businesses –, alongside those expected to come from the expansion of automation and digitalisation, as well as those from a higher resort by employers to workers from outside the EU.

Looking at financial conditions, Board members showed that the main interbank money market rates had halted their descending path in mid-May, while yields on government securities had continued to decrease gradually until towards end-June, reflecting the higher relative attractiveness of investments in domestic currency, inter alia due to the steeper decline in the annual inflation rate and to the reconfirmation of its anticipated downward trajectory.

Moreover, it was observed that the EUR/RON exchange rate had shifted in mid-May and had then stuck to slightly higher readings than those prevailing in 2022 H1, inter alia amid the revision of investor expectations on the near-term prospect of the Fed’s monetary policy stance. In relation to the US dollar, the leu had also posted a depreciation in May, however largely reversed in June, as the dollar had resumed its weakening trend against the euro, amid the stronger global risk appetite and the expectations on a relatively more pronounced tightening of the ECB’s monetary policy in the period ahead.

Risks to the behaviour of the leu’s exchange rate continued, nevertheless, to come from the still significantly wide external imbalance, as well as from the higher uncertainties surrounding budget consolidation at the current economic and social juncture, some Board members cautioned. It was agreed, however, that opposite influences would probably continue to prevail in the near run. Those would stem from the relative attractiveness of domestic currency investments, but also from seasonal and incidental factors, with implications inter alia for expectations on exchange rate developments over the very short term.

At the same time, it was remarked that the annual growth rate of credit to the private sector had 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 had continued to decelerate swiftly, while those of foreign currency loans had halted their upward path, posting successive declines in April and May. Therefore, the share of leu-denominated loans in credit to the private sector had seen its downtrend moderate considerably, diminishing only marginally, to 67.6 percent in May from 67.8 percent in March.

As for future developments, Board members pointed out that the annual inflation rate would probably continue to fall over the following months, in line with the latest medium-term forecast published in the May 2023 Inflation Report, which had anticipated its drop to a one-digit level in Q3 and then to 7.1 percent in December 2023 and 3.9 percent at the end of the projection horizon.

It was observed that the future decrease in the annual inflation rate would further be driven primarily by supply-side factors, mainly disinflationary base effects and the improvement of global production and supply chains, alongside the sizeable downward corrections of some commodity prices, especially of energy, crude oil and agri-food items, seen in the recent quarters amid the easing of wholesale markets. The base effects would continue to be manifest particularly in the energy segment, as well as in the processed food segment, thus also visibly affecting core inflation dynamics in the period ahead, while the decreases in some commodity prices would feed through gradually, Board members remarked.

Uncertainties and risks surrounding the current inflation outlook stemmed, however, from additional oil supply cuts recently announced by OPEC countries, but also from the measure to temporarily cap the mark-ups on basic food products, Board members noted.

At the same time, it was agreed that the cyclical position of the economy was envisaged to exert more moderate inflationary pressures and more markedly on the wane over the short term than in the previous projection, as the new assessments pointed to more modest economic growth during Q2 and Q3 overall compared with earlier forecasts, after its faster-than-expected slowdown in Q1. The developments rendered it likely for excess aggregate demand to see lower and more quickly decreasing values over the near term than those in the May forecast, Board members deemed.

Moreover, it was observed that developments implied a more moderate-than-previously anticipated annual GDP growth during that period, underpinned in Q2 as well by private consumption primarily, but also to a certain extent by gross fixed capital formation, as suggested by the latest statistical data. Board members were of the opinion that a contractionary impact was, however, possible from net exports, given that the relatively more pronounced loss of momentum seen again in April by imports of goods and services was largely attributable to the improvement in the terms of trade. They also remarked the sharper decline, against that background, of the trade deficit and of the current account deficit in the first month of Q2 versus the same year-earlier period.

At the same time, the protraction of the war in Ukraine and of the related sanctions generated significant uncertainties and risks to the outlook for economic activity, hence to medium-term inflation developments. That could have additional adverse effects on households’ and investors’ confidence, as well as on their income, but also on the economies of major trading partners, Board members repeatedly showed.

Furthermore, heightened uncertainties and risks were associated with the fiscal and income policy stance, Board members agreed. They referred to the data on the budget execution in the first five months of the year, as well as to the recent or potential pay rises in the public sector, in the current challenging economic and social environment domestically and globally. Nevertheless, mention was also made of the excessive deficit procedure and the related commitments, calling for the adoption of substantial fiscal measures in order to continue budget consolidation in line with the established calendar.

Also from that perspective, Board members insisted on the importance of attracting and effectively using the EU funds, especially those under the Next Generation EU programme. That was conditional on fulfilling strict milestones and targets, but was essential for carrying out the necessary structural reforms and energy transition, as well as for counterbalancing, at least in part, the contractionary impact of supply-side shocks, compounded inter alia by the tightening of economic and financial conditions worldwide.

It was underlined again that a balanced macroeconomic policy mix and the implementation of structural reforms, also by using EU funds, to foster the growth potential over the long term, were of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand adverse developments.

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 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.