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 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 seen a faster decline in the first two months of 2024 Q2, falling to 5.12 percent in May, below the forecast, from 6.61 percent in March, mainly as a result of the notable drop in energy prices, especially natural gas prices, following the legislative changes implemented as of April, as well as amid the further deceleration in the growth rate of food prices.
It was noted that the annual adjusted CORE2 inflation rate had continued to decrease gradually over that period, in line with expectations, down to 6.3 percent in May from 7.1 percent in March 2024, as the pace of disinflation had slowed down even more in the processed food segment, but had remained unchanged in the non-food segment and stepped up slightly in the case of services, the annual growth rates of which had still been, however, high.
In that light, Board members remarked the multitude of diverging factors that had continued to affect the behaviour of core inflation over that period. It was agreed that the main drivers had further been the disinflationary base effects and the downward corrections of commodity prices, which had nevertheless been fading away in the processed food segment, but had extended and strengthened across the non-food sub-components of core inflation. Additional influences had stemmed from the decreasing dynamics of import prices, as well as from firms’ and consumers’ short-term inflation expectations recently 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 the prices of some goods and services, inter alia amid a robust consumer demand that had strongly increased in April, Board members underlined.
In that context, mention was again made of the dynamics of industrial producer prices for consumer goods that had continued to slow their decrease in April-May, inter alia amid the re-acceleration of the annual growth in the prices of durables. At the same time, financial analysts’ longer-term inflation expectations had remained stuck to the upper bound of the variation band of the target in June, after a marginal decline in May, while the consumer purchasing power had spiked up in April reflecting the developments in the dynamics of net real wage, Board members pointed out.
As for the cyclical position of the economy, Board members showed that in 2024 Q1, economic activity had rebounded to a lower extent than anticipated, up by 0.4 percent, after its 0.6 percent contraction in 2023 Q4, which made it likely for excess aggregate demand to have further narrowed over that period, contrary to expectations.
At the same time, annual GDP growth had contracted markedly in 2024 Q1 to 0.1 percent from 3.0 percent in the previous three months. It was remarked that the loss of momentum had been driven that time round mainly by gross fixed capital formation, whose annual dynamics had plummeted from the very high two-digit level seen in 2023 Q4, whereas household consumption had continued to witness a faster annual growth.
Moreover, Board members noted that net exports had exerted a larger contractionary influence in 2024 Q1, against the backdrop of a slight pick-up in the differential between the positive dynamics of the import volume of goods and services and the further negative change in the export volume. However, the growth rate of the trade deficit had remained unchanged, while that of the current account deficit had decreased considerably from the previous quarter, given, inter alia, the strongly faster increase in the secondary income surplus during that period, mainly on account of inflows of EU funds to the current account.
Looking at the labour market, Board members discussed the latest data and surveys confirming, in their view, a halt in the easing of market conditions in 2024 Q1 – given also the relatively flat job vacancy rate. Moreover, it was observed that in April 2024 the number of employees economy-wide had resumed its monthly increase at a swift pace, while the ILO unemployment rate had advanced only slightly in April-May to 5.4 percent, after a more pronounced drop in Q1, remaining below the average 5.6 percent level seen over the last two quarters of the previous year. At the same time, employment intentions over the very short horizon had followed a steeper upward trend in Q2 overall, their substantive drop in June notwithstanding, while the labour shortage reported by companies had widened again quarter on quarter.
In addition, Board members noted that the double-digit annual growth rate of the average gross nominal wage had continued to rise in Q1, before remaining unchanged in April. In turn, the annual dynamics of unit wage costs had continued to climb in the first three months of the year economy-wide, being further particularly elevated in industry, while the steep decline in the latter in April had owed mainly to a calendar effect. Board members viewed those developments as a matter of concern, considering the potential effects on future inflation, but also on external competitiveness.
At the same time, it was agreed that the persistent mismatch between labour demand and supply in some segments and especially the public sector wage dynamics and the increase in the gross minimum wage in July could generate additional pressures on wages and labour costs in the private sector in the near future. However, the recently steeper downward trend of the annual inflation rate and the still sluggish dynamics of external demand, but also the higher resort by employers to workers from outside the EU could act in the opposite direction, some Board members reiterated.
Turning to financial conditions, Board members showed that the main interbank money market rates had remained quasi-stable in May and had posted slight declines afterwards, while the average lending rate on new business had continued to shrink sizeably in April and May, albeit more modestly than in March. Moreover, it was observed that long-term yields on government securities had witnessed a moderate downward adjustment in mid-Q2, but then climbed and stuck to the higher readings seen in April. That had occurred inter alia amid the fluctuation of investor expectations on the outlook for the Fed’s interest rate, as well as in view of the political events in Europe, which had entailed shifts in global financial market sentiment and in the risk perception towards the region.
Against that background, the EUR/RON exchange rate had stayed in May-June at the higher levels it had returned to in the second part of April. In relation to the US dollar, the leu had recovered in May the loss seen in the previous month, before weakening again in June, amid the former’s strengthening on international financial markets.
Risks to the behaviour of the EUR/RON exchange rate remained elevated, Board members pointed out, referring to the twin deficits and to the uncertainties surrounding the fiscal consolidation process, but also to the current geopolitical tensions. Over the near term, the relative attractiveness of investments in domestic currency and the action of some seasonal factors could, however, have a stronger influence.
At the same time, it was observed that the annual growth rate of credit to the private sector had picked up to 5.8 percent in April, after having fallen to 4.7 percent in March, while in May it had stood at 5.7 percent. That had reflected the further swifter increase in household credit during that period, mainly on account of consumer loans in domestic currency, whose flow had reached a historical high in April and diminished only slightly afterwards. Conversely, the annual dynamics of loans to non-financial corporations had stuck to a downward path, prompted by the decrease in the rate of change of the leu-denominated component, counterbalanced to a small extent in terms of impact by the upward dynamics of the sector’s foreign currency credit. Against that backdrop, the share of leu-denominated loans in credit to the private sector had narrowed to 68.8 percent in May from 68.9 percent in March 2024.
As for the near-term outlook, Board members pointed out that, according to the recent data and analyses, the annual inflation rate would decline further over the following months, on a significantly lower path than that shown in the May 2024 medium-term forecast, which had seen it go down to 4.9 percent in December 2024, to 3.5 percent in the closing month of 2025, and to 3.4 percent at the end of the projection horizon.
It was agreed that the decrease would be further driven primarily by supply-side factors, whose disinflationary action would remain stronger in the near run than previously anticipated, amid the influences from base effects and from legislative changes in the energy field implemented as of April. Those influences would reflect particularly in the energy, administered prices and fuel segments, but also at the level of non-food items and services sub-components of core inflation. Moreover, they would be counterbalanced only to a small extent by the rebound envisaged in food price dynamics, under the impact of unfavourable base effects and the uptrend in some agri-food commodity prices, Board members remarked.
Significant uncertainties were, however, associated with the impact exerted in the future on natural gas and electricity prices by the legislative changes applied in April, as well as with the prospective evolution of crude oil and other commodity prices, especially in view of geopolitical tensions, Board members deemed.
Furthermore, it was noted that underlying inflationary pressures were likely to be somewhat stronger in the near run than in the prior forecast, given that, after the unexpected contraction in 2024 Q1, excess aggregate demand was anticipated to rise in the following two quarters slightly above the previously-envisaged values, while the annual dynamics of unit labour costs were seen sticking to a very high two-digit level. Increasingly obvious disinflationary effects were, however, anticipated over that time horizon from the slacker growth rate of import prices and the gradual downward adjustment of short-term inflation expectations, 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 significant quarterly increases of the economy in 2024 Q2 and Q3, and more solid than previously envisaged, implying a gradual recovery of annual GDP dynamics during that period, after the steep decline in Q1.
It was observed that, according to high-frequency indicators, private consumption had continued to be the hefty driver of annual economic growth during Q2, while an increased contribution was possible from gross fixed capital formation, mainly on account of construction. A larger contractionary impact was, however, envisaged again from net exports, as the annual dynamics of the imports of goods and services had seen the differential with those of exports widen significantly in April, recording a relatively larger leap into positive territory. Against that background, the trade deficit had witnessed a considerably faster deepening in annual terms, whereas the current account deficit had doubled versus the same year-earlier period, inter alia amid the marked worsening of the primary and secondary income balances, Board members repeatedly pointed out.
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 five months of the year, as well as the public sector wage dynamics and the full impact of the new law on pensions. At the same time, mention was also made of the high risks associated with the conduct of those policies over a longer time horizon, amid the fiscal and budgetary measures that could be implemented to achieve fiscal adjustment and to put the budget deficit on a sustainable downward path, compatible with the requirements of the excessive deficit procedure and with the conditionalities attached to other agreements signed with the EC.
Moreover, it was shown that uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, also continued to arise from the war in Ukraine and the Middle East conflict, as well as from the economic performance in Europe.
Also from that perspective, Board members underscored again the importance of keeping the fast pace of absorbing EU funds and the requirement for the efficient use thereof, including those under the Next Generation EU programme, which were deemed 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.
Board members were of the unanimous opinion that the decline in the annual inflation rate in the recent period and over the near term, on a significantly lower path than previously anticipated, but also the still elevated uncertainty surrounding developments over the longer time horizon warranted a prudent lowering of the monetary policy rate. The measure was aimed at ensuring and maintaining price stability over the medium term, in a manner conducive to achieving sustainable economic growth. Board members reiterated, in that context, 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 6.75 percent from 7.00 percent. Moreover, it decided to lower the lending (Lombard) facility rate to 7.75 percent from 8.00 percent and the deposit facility rate to 5.75 percent from 6.00 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.