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 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 declined in Q2 by more than expected, i.e. down to 4.94 percent in June, from 6.61 percent in March, mainly due to the notable drop in energy prices, especially natural gas prices, following the legislative changes implemented as of April 2024, as well as amid the further deceleration in the growth rate of food prices.
In turn, the annual adjusted CORE2 inflation rate had fallen at a faster pace, also compared with the forecasts, down to 5.7 percent in June, from 7.1 percent in March 2024, as the pace of disinflation had slowed down in the processed food segment, but had stepped up for the non-food and services sub-groups, the annual growth rates of which had remained high, however, Board members underlined.
Following the assessment of numerous divergent factors that had continued to affect the behaviour of core inflation in Q2, Board members agreed that the main drivers over that period too had been the disinflationary base effects and the downward corrections of commodity prices, the impact of which had softened or faded away in the processed food segment, but had become increasingly visible in the case of the non-food sub-components. Additional influences had stemmed from the decreasing dynamics of import prices, as well as from firms’ and consumers’ short-term inflation expectations re-embarking on a slight downtrend. A moderate opposite impact had had the new increases in unit labour costs recorded in the first months of 2024, which had been passed through, at least in part, into some consumer prices, inter alia amid a robust demand for goods, Board members remarked.
In that context, it was noted that the dynamics of industrial producer prices for consumer goods had continued to go down in Q2, albeit at a much slower pace, inter alia amid the re-acceleration of the annual growth in durables prices. At the same time, financial analysts’ longer-term inflation expectations had declined only marginally inside the variation band of the target at the onset of H2, while the consumer purchasing power had increased in April-May, in line with the upward dynamics of net real wage in that period, Board members pointed out.
As for the cyclical position of the economy, Board members showed that the recently revised statistical data had indicated a 0.7 percent rise in economic activity in 2024 Q1, more modest than anticipated, implying a contraction in excess aggregate demand in that period as well.
Moreover, according to the new data, the annual growth rate of GDP had contracted markedly in 2024 Q1, i.e. to 0.5 percent, from 3.0 percent in 2023 Q4. It was observed that the decline had been driven mainly by gross fixed capital formation, whose annual dynamics had plummeted in 2024 Q1 from the very high two-digit level seen in 2023 Q4, whereas household consumption had continued to witness a faster annual rise.
Net exports had exerted a larger contractionary influence in 2024 Q1, against the backdrop of a slight pick-up in the positive differential between the dynamics of the import volume of goods and services and the negative change in the export volume. However, the annual growth rate of the trade deficit had advanced only marginally, while that of the current account has decreased considerably, given, inter alia, the strongly faster increase in the secondary income surplus, mainly on account of inflows of EU funds to the current account, Board members noted.
Over the near term, Board members agreed that economic growth would likely be somewhat more robust in 2024 Q2 and Q3 than had been expected in May, implying a slight widening of the positive output gap and its return close to the values previously forecasted, but also a gradual recovery of the annual GDP growth over that period.
Furthermore, following the assessment of relevant indicators, it was concluded that, in 2024 Q2, private consumption had remained the main driver of economic growth, whereas gross fixed capital formation could have made a larger contribution, mostly due to construction. Conversely, net exports had exerted a likely stronger contractionary influence, as the annual change in the imports of goods and services had further posted a wider positive differential with that in exports in April-May, seeing a relatively sharper increase. Against that background, the annual growth rates of the trade and current account deficit had stepped up significantly in April-May, as Board members repeatedly pointed out.
Looking at the labour market, Board members assessed that, in 2024 Q2, tensions had resumed a mild easing trend that had been discontinued in Q1, but had remained high. In that context, reference was made to the strong contraction in the number of employees economy-wide in May, after the substantial rise in April, as well as to the gradual pick-up in the ILO unemployment rate in April-June to 5.5 percent, marginally below the 5.6 percent average seen in 2023 H2. It was also shown that the July surveys had indicated more moderate employment intentions over the very short horizon than in Q2, but stronger than in 2023 H2, as well as a declining labour shortage, in contrast to the rising shortage reported by companies in the first two quarters of 2024.
At the same time, it was observed that the double-digit annual growth rate of the average gross nominal wage had diminished slightly in April-May overall, as a result of its deceleration in the private sector, while that of unit labour costs in industry had gone down more strongly, amid the sizeable monthly fluctuations stemming from a calendar effect. However, those dynamics had remained high and concerning in terms of the potential effects exerted on future inflation, as well as on external competitiveness, Board members concluded, citing also the new rise in the minimum gross wage economy-wide recorded in July 2024.
Moreover, it was agreed that the persistent mismatches between labour demand and supply in some market segments and especially the public sector wage dynamics could generate, in the near future as well, additional pressures on wages and labour costs in the private sector. Opposite influences could arise, however, from the recently steeper downtrend in inflation rate, as well as from the higher resort by employers to workers from outside the EU, some Board members reiterated.
Turning to financial conditions, Board members underscored the decline in the main interbank money market rates shortly after the NBR’s cut in its key rate and interest rates on standing facilities in July as well as their subsequent flattening. At the same time, they noted the turn of long-term yields on government securities, which at the beginning of the month had re-embarked and afterwards stayed on a generally downward path – relatively in line with developments in advanced economies and in the region. That had occurred amid investors’ revised expectations on the Fed’s interest rate path, with an impact on global risk appetite as well.
Against that background, the EUR/RON exchange rate had witnessed a downward correction in the first part of July and then had remained relatively stable. Towards the end of the month it had climbed to the higher values prevailing in Q2 amid the increased international financial market volatility inter alia following the escalation of tensions in the Middle East. The USD/RON exchange rate had dropped even more sharply in the first half of the month, but afterwards it had risen only slightly and temporarily, given the former’s movements on international financial markets.
Risks to the behaviour of the leu’s exchange rate remained elevated, Board members pointed out, referring to the twin deficits and to the uncertainties surrounding the fiscal consolidation process, amid inter alia the electoral context, but also to the current geopolitical tensions and the monetary policy decisions taken by major central banks. Over the near term, the relative attractiveness of investments in the local currency remains also significant in terms of influence, whereas the relevance of seasonal factors could decrease compared to previous years, some Board members deemed.
It was noted that the annual growth rate of credit to the private sector had picked up to 6.7 percent in June from 5.7 percent in May, primarily on account of the significantly faster increase in leu-denominated credit to non-financial corporations, whose flow had hit a record high also as a result of abundant funds allotted via government programmes. At the same time, the dynamics of household credit further grew rather swiftly, due to developments in both categories of leu-denominated loans, i.e. consumer loans and housing loans. Against that backdrop, the share of leu-denominated loans in credit to the private sector had widened to 69.1 percent in June from 68.8 percent in May, some Board members pointed out.
As for the future macroeconomic developments, Board members showed that the new assessments revealed an improvement in the inflation outlook compared to the previous forecast, especially over the near run, given that the annual inflation rate was expected to fall at the end of 2024 and in 2025 Q1 to significantly lower-than-previously-projected values, and, after a temporary pick-up in 2025 Q2, to return and remain slightly below the upper bound of the variation band of the target. Specifically, it would go down to 4.0 percent in December 2024, 3.4 percent in the closing month of 2025 and 3.2 percent at the end of the projection horizon, compared to 4.9 percent, 3.5 percent and 3.4 percent respectively, as indicated by the prior projection for the same reference periods, Board members emphasised.
It was agreed that the decrease would be further driven primarily by supply-side factors, whose disinflationary action would continue to be stronger over the short term than previously anticipated, amid disinflationary base effects and the influences from legislative changes in the energy sector implemented as of April. At the same time, it was noted that disinflationary base effects would mainly materialise in the non-food sub-components of core inflation, as well as in the growth rates of administered prices and fuel prices, while small opposite base effects would affect in the near run the dynamics of processed food prices, which would thus see a turning point in 2024 Q3, also under the influence of the trend reversal in some agri-food commodity prices.
However, significant uncertainties were associated with future movements in energy and food prices amid the legislative changes and the protracted drought this year, as well as with the prospective evolution of crude oil and other commodity prices in view of heightening geopolitical tensions, Board members stressed.
At the same time, it was noted that underlying inflationary pressures were expected to persist over the entire forecast horizon and to ease only slightly compared to the first part of this year and the former forecast, given that, following a meagre contraction in 2024 H2, excess demand would likely quasi-stabilise over the next six quarters, at a significant level, marginally lower than priorly foreseen. Moreover, the double-digit annual dynamics of unit labour costs in the private sector were anticipated to further climb this year as a whole and thus exceed the slightly lower previously-projected level, Board members remarked.
Nevertheless, core inflation would also capture the increasingly significant influences of disinflationary base effects anticipated to emerge in the non-food and services segments, which would outweigh by far the opposite influences stemming in the near run from the processed food price dynamics. Furthermore, 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 somewhat faster pace than in the prior projection, Board members noted.
Under these conditions, the annual adjusted CORE2 inflation rate would probably continue to decline at a faster tempo than headline inflation, on a steeper-than-previously-anticipated path. Specifically, it was seen falling to 4.6 percent in December 2024, 3.5 percent in the closing month of 2025 and 3.4 percent at the end of the projection horizon, compared to 5.3 percent, 3.7 percent and 3.5 percent respectively, as indicated in the prior forecast for the same reference periods.
As for the future cyclical position of the economy, Board members discussed the prospects for economic activity, showing that it was foreseen to gather momentum in 2024 and 2025 overall, albeit at a somewhat slower pace than envisaged before. That was anticipated to occur amid the slowdown in inflation and the gradual recovery of external demand, but especially under the impact of the fiscal policy stance and the use of EU funds under the Next Generation EU instrument.
It was noted that, similarly to previous forecasts, household consumption was anticipated to become again in 2024 and remain in 2025 the main driver of GDP advance, amid the marked pick-up in real disposable income growth – due to increases in wages and social transfers overlapping the relatively lower inflation rate downtrend –, but also given the real interest rates on household loans and deposits.
Gross fixed capital formation would also probably continue to make a sizeable contribution to GDP dynamics. However, its growth rate was seen slowing down considerably in 2024-2025 after the swift pick-up in 2023, but remaining fast from a historical perspective, amid the absorption and use of a large volume of EU funds. The decline in GFCF growth versus 2023 was expected, inter alia, in the context of significant uncertainties associated with budget programmes and executions, as well as geopolitical tensions and economic developments across Europe, Board members remarked.
Conversely, the contribution of net exports was foreseen to become again and remain more contractionary in 2024 and 2025 than previously anticipated, amid the prospects of a relatively brisker rise in the dynamics of the import volume of goods and services, coupled with the differential between the rate of change of domestic absorption and that of external demand. Against that background, the current account deficit-to-GDP ratio would probably halt its downward correction in 2024-2025 and hence stay well above European standards, remaining a major vulnerability and inducing risks to inflation, the sovereign risk premium and, ultimately, to economic growth sustainability, Board members underlined.
Also from that perspective, Board members emphasised the heightened uncertainties and risks stemming from the fiscal and income policy stance in 2024, given the budget execution in the first half of the year, the public sector wage dynamics and the full impact of the new law on pensions. Nonetheless, strong opposite risks were associated with the actions and measures likely to be taken in the future to achieve the fiscal correction, amid the medium-term fiscal-structural plan presumed to be devised and submitted to the European Commission this autumn, in accordance with the new EU economic governance framework, Board members deemed.
At the same time, it was shown that 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 the economic performance in Europe.
Against that background, Board members underscored again the importance of keeping the fast pace of absorbing EU funds and reiterated the requirement for the efficient use thereof, 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.
Following the analysis, Board members were of the unanimous opinion that the improvement in the inflation outlook versus the previous forecast, especially in the very short term and amid the still elevated uncertainty surrounding forecasts over the longer time horizon, warranted a prudent lowering of the monetary policy rate. That was aimed at adequately calibrating the restrictiveness of the monetary policy stance from the standpoint of ensuring and maintaining price stability over the medium term, in a manner conducive to achieving sustainable economic growth.
In that context, Board members underlined that 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, were of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand adverse developments. 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 cut the monetary policy rate to 6.50 percent from 6.75 percent. Moreover, it decided to lower the lending (Lombard) facility rate to 7.50 percent from 7.75 percent and the deposit facility rate to 5.50 percent from 5.75 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.