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, Vice Chairman of the Board and First Deputy Governor of the National Bank of Romania; Florin Georgescu, Board member and Deputy Governor of the National Bank of Romania; Cosmin Marinescu, Board member and Deputy Governor of the National Bank of Romania; Aura-Gabriela Socol, Board member; Roberta-Alma Anastase, Board member; Alexandru Nazare, Board member; Csaba Bálint, Board member; Cristian Popa, 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 risen over the last three months of 2024, thus coming to exceed expectations for 2024 Q4 as a whole, up to 5.14 percent in December from 4.62 percent in September. It was shown that the advance had been driven mainly by higher fuel prices – primarily as a result of the significant appreciation of the US dollar on the international financial market –, and to a small extent by the new increases in food prices, amid the severe drought in the summer of 2024 and the hike in some commodity prices.
At the same time, it was noted that the annual adjusted CORE2 inflation rate had seen a halt in its downward trend, remaining flat at 5.6 percent until December, i.e. a level similar to that at end-Q3, amid the further acceleration of the annual growth in processed food prices being accompanied in 2024 Q4 by the markedly slower disinflation in the non-food segment and by the steady pace of disinflation in services prices, the annual growth rates of which remained high, several Board members pointed out.
Following the analysis, it was concluded that the recent behaviour of core inflation reflected the relatively equal opposite influences coming over that period, on the one hand, from the base effects in non-food sub-components and from the decline in import price dynamics and, on the other hand, from the hike in some agri-food commodity prices, as well as from higher wage costs passed through, at least in part, into some consumer prices, inter alia amid still high short-term inflation expectations and a robust demand for goods.
In that context, reference was made to the step-up in the annual dynamics of industrial producer prices for consumer goods October through November, after a seven-quarter decrease, as well as to the high or rising short-term inflation expectations of firms and consumers in 2024 Q4. At the same time, it was noted that the financial analysts’ longer-term inflation expectations had remained until end-2024 marginally below the upper bound of the variation band of the target, where they had dropped in July, whereas the household real disposable income had increased faster September through October, reflecting the larger social transfers and the high dynamics of net real wage.
As for the cyclical position of the economy, Board members showed that economic activity had stalled in 2024 Q3, after having increased by 0.1 percent in the previous three months (quarterly changes), deeming that in the given context, excess aggregate demand had further narrowed relatively in line with forecasts.
Annual GDP growth had stepped up to 1.2 percent in 2024 Q3 from 0.9 percent in the previous quarter, although the fast rate of increase of household consumption had slowed down somewhat and the annual dynamics of gross fixed capital formation had continued to see a steep decline, falling to a slightly positive level, i.e. a nine-quarter low. It was noted that their impact on the annual GDP growth rate had been more than offset by the substantial decline, i.e. by more than two thirds, in the negative contribution of net exports, amid the visibly swifter decrease in the annual change in the import volume of goods and services than in that of the export volume. The narrowing differential between the latter two had also triggered a significant deceleration in 2024 Q3 in the annual growth rates of trade and current account deficits, compared to the previous quarter, Board members remarked.
Looking at the labour market, Board members agreed that, according to the latest data and surveys, labour market tightness had seen a marked decline in 2024 Q3, in line with the previous assessments, but also a halt – probably temporary – in its downward trend in Q4. Specifically, it was noted that the number of employees economy-wide had resumed its monthly increase in September and continued to grow at a relatively fast pace in October 2024, while the ILO unemployment rate had fallen to 5.4 percent in October and 5.3 percent in November, after having risen to an average of 5.6 percent in Q3. Furthermore, employment intentions over the very short horizon had halted their decline in October and remained stable over the following two months, thus reflecting a slower quarterly decrease, whereas the labour shortage reported by companies had shrunk more visibly in 2024 Q4 as a whole, on account of developments in industry and construction.
Nevertheless, the two-digit annual growth rate of the nominal gross wage and that of unit labour costs in industry had increased in Q3 – to 16.7 percent and 18.6 percent respectively, mainly under the impact of the hike in the minimum wage economy-wide in July –, and after the drop seen in October, they had remained elevated, being further a reason for concern from the perspective of inflation, but also of external competitiveness, Board members deemed on several occasions.
At the same time, it was assessed that the new increase in the minimum wage level and the removal of some tax breaks at the onset of 2025, alongside the persistent mismatch between labour demand and supply in some sectors, would likely fuel wage and labour cost pressures in the private sector, inter alia in the context of the structural labour market deficiencies, but also amid the recent developments in inflation, as well as in household consumption. However, opposite effects were expected from wage and employment policy measures implemented in the public sector in 2025 for budget consolidation purposes, as well as from external demand and the uncertainties surrounding its outlook in the current global context, alongside the higher resort by employers to workers from outside the EU, but also to technology integration, Board members deemed.
Turning to financial conditions, Board members noted that the main interbank money market rates had witnessed sizeable increases in the second part of November and then had followed a steady path. At the same time, it was remarked that long-term yields on government securities had steepened and extended their upward course until the closing 10-day period of December 2024. That had occurred in the context of the high volatility of the global risk appetite, but also amid the uncertainty associated with the electoral events in November and early December, conducive to a temporary rise in financial investor concerns about the fiscal and external positions of the economy. The EUR/RON exchange rate had remained broadly stable in November and December, at the higher values it had returned to in mid-Q3. In relation to the US dollar, the leu had continued to depreciate markedly during both months, as the former had strengthened visibly on international financial markets over that period.
Board members agreed that risks to the behaviour of the leu’s exchange rate remained elevated, referring to the large twin deficits and to the uncertainties surrounding the fiscal consolidation process, also in view of the domestic political situation. Moreover, reference was made to the geopolitical tensions, as well as to the economic policies and developments in advanced countries, with potential implications inter alia for the major central banks’ monetary policy stance and for the movements in the international financial market.
It was also observed that the annual growth rate of credit to the private sector had continued to pick up during the first two months of 2024 Q4 overall, standing at 8.8 percent in November from 8.4 percent in September, on the back of household credit, given the further step-up in the dynamics of the leu-denominated component, amid the historical high reached by the flow of housing loans and the elevated values recorded by new consumer credit. The share of the domestic currency component in credit to the private sector had thus widened to 70.2 percent in November from 69.8 percent in September.
As for short-term developments, Board members showed that the new assessments reconfirmed the prospects for the annual inflation rate to decline in the first three months of 2025, yet on a higher path than that shown in the November 2024 medium-term projection, which had also seen it go up temporarily in 2025 Q2 and then fall gradually to 3.5 percent in December 2025 and 3.3 percent in September 2026, i.e. the end of the forecast horizon.
It was observed that the decrease in 2025 Q1 would be largely driven by supply-side factors, primarily by base effects in the non-food sub-components of core inflation and in the fuels segment. The overall disinflationary action of supply-side factors would, however, be weaker than previously anticipated, given the recent developments in fuel and crude oil prices, but also the persistent opposite effects exerted on food and energy price dynamics by the 2024 unfavourable weather conditions and by the increase in some commodity prices, as well as by the higher energy consumption over the winter months, Board members remarked.
Moreover, the balance of risks from supply-side factors remained tilted to the upside, Board members deemed. They pointed out the uncertainties associated with the forecasts on energy and food prices given the applicable legislation and the price movements in wholesale markets, as well as with the future path of crude oil and other commodity prices in view of geopolitical and trade tensions.
It was agreed that, over the very short term, underlying inflationary pressures would continue to ease in line with previous assessments, given the likely decrease of excess aggregate demand to very low values in 2024 Q4 and 2025 Q1, yet amid the still robust consumer demand and the swift growth of unit labour costs in the private sector, although decelerating versus the rates seen in the first three quarters of 2024. However, more obvious disinflationary effects were expected over that time horizon from the slacker dynamics of import prices, as well as from the downward adjustment of short-term inflation expectations, albeit slower and from higher levels than previously anticipated, several Board members underlined.
When discussing the near-term outlook for the cyclical position of the economy, Board members showed that the new assessments indicated moderate quarterly increases of the economy for 2024 Q4 and 2025 Q1, relatively similar to the previous forecasts, yet amid mixed developments of the major aggregate demand components against the same year-earlier period, at least in the closing quarter of 2024.
Thus, it was observed that, according to high-frequency indicators, private consumption had probably continued to be the main driver of annual economic growth during 2024 Q4, while a significant negative contribution – primarily attributable to construction – could come from gross fixed capital formation. At the same time, the contractionary impact of net exports appeared to diminish again, albeit modestly, as the annual change in the exports of goods and services had advanced slightly October through November 2024, narrowing its negative differential with that in imports, which had remained unchanged. Against that background, the trade deficit had continued to see a slower annual increase, whereas the current account deficit had posted a considerably swifter widening, as a result of the deterioration of income balances, Board members pointed out.
Considerable uncertainties and risks to the forecasts stemmed from the future fiscal and income policy stance, Board members repeatedly showed. They referred to the recently approved package of fiscal-budgetary measures implemented at the onset of 2025 for budget consolidation purposes in line with the National Medium-Term Fiscal-Structural Plan agreed with the European Commission, but also in line with the excessive deficit procedure, under the new EU economic governance framework.
Board members also noted the high uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, arising from the war in Ukraine and the Middle East conflict, as well as from the economic performance in Europe/globally and from international trade developments, in the context of escalating geopolitical tensions and of the economic policy measures taken by advanced countries.
Also from that perspective, Board members underscored again the importance of absorbing and efficiently using EU funds, especially 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 and by budget consolidation, as well as for enhancing the growth potential and strengthening the resilience of the Romanian economy.
Board members were of the unanimous opinion that the analysed context overall warranted a policy rate status-quo, with a view to ensuring and maintaining price stability over the medium term, in a manner conducive to achieving sustainable economic growth.
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 keep the monetary policy rate at 6.50 percent. Moreover, it decided to leave unchanged the lending (Lombard) facility rate at 7.50 percent and the deposit facility rate at 5.50 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.