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.
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 gone up to 5.42 percent in July 2024, from 4.94 percent in June, and then had fallen somewhat more modestly to 5.10 percent in August, thus staying above the forecast. It was noted that the advance from June had owed to the faster rise in food and energy prices over that period amid the severe drought and the pick-up in the distribution tariffs for natural gas, the impact of which had been only partly counterbalanced by that of the persistence of disinflation in administered prices and fuel prices under the influence of base effects and the fall in crude oil prices.
At the same time, the annual adjusted CORE2 inflation rate had seen a halt in its downward trend, climbing to 5.8 percent in August from 5.7 percent in June, as the growth rate of processed food prices had re-accelerated and the fast dynamics of the services prices had posted a slower decline, whereas the pace of increase of non-food prices had continued to decelerate somewhat rapidly, the same as in Q2, remaining however elevated, Board members remarked.
Following the assessment, it was concluded that the slight rise in the annual core inflation rate had been mainly attributable to an unfavourable statistical effect in the processed food segment and to the hike in some agri-food commodity prices, as well as to 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. The influences thus exerted had outweighed those stemming from the disinflationary base effects in non-food sub-components as well as from the decrease in import price dynamics, Board members pointed out.
Against that background, it was noted that the dynamics of industrial producer prices for consumer goods had actually stopped its downward trend in July-August 2024, inter alia amid the further acceleration of the annual growth in durables prices, while firms’ and consumers’ short-term inflation expectations had seen a renewed pick-up in Q3 as a whole, in the context of volatile monthly developments. At the same time, financial analysts’ longer-term inflation expectations had witnessed a halt in their downward adjustment in August and had remained unchanged in September, marginally below the upper bound of the variation band of the target, while the consumer purchasing power had increased at a stronger pace at the beginning of Q3, reflecting the developments in the dynamics of net real wage, Board members pointed out.
As for the cyclical position of the economy, Board members observed that in 2024 Q2 the economic activity had posted a slower increase, to 0.1 percent from 0.5 percent in the previous three months, so that excess aggregate demand was likely to have further narrowed over that period, contrary to forecasts.
Household consumption had however seen a significantly faster rate of increase in Q2, including in annual terms, contributing decisively to a larger advance in annual GDP, to 0.8 percent from 0.5 percent in Q1, Board members showed. It was remarked that gross fixed capital formation had also made a notable contribution, its annual growth rate remaining robust, although on a further slowdown compared to the prior quarter.
By contrast, net exports had exerted a markedly larger contractionary influence in 2024 Q2, given that the volume of imports of goods and services had recorded a faster increase, while the volume of exports had continued to decline in annual terms. Consequently, the trade deficit and the current account deficit had reported significantly faster dynamics, spurred in the latter case also by the considerable worsening of the secondary income balance, reflecting the lower inflows of EU funds to the current account.
Looking at the labour market, Board members agreed that in Q3 market tensions had continued the easing trend resumed towards the end of the previous quarter, but had remained high. Thus, it was noted that, in June-July, the number of employees economy-wide had recorded only a slight pick-up, while the ILO unemployment rate had resumed its rise at the beginning of Q3, reaching 5.5 percent in August from 5.1 percent in June. At the same time, for Q3 as a whole, surveys pointed to a sharp decline in employment intentions over the very short horizon, as well as to a contraction in the labour shortage reported by companies, larger in terms of magnitude than the increase in the previous quarter.
The dynamics of wages and labour costs had however remained very fast and a matter of concern from the viewpoint of inflation, but also of external competitiveness, the Board members deemed on several occasions. In that context, reference was made to the two-digit annual growth rate of the nominal gross wage and its step-up to 17.3 percent in July – mainly under the impact of the new hike in the gross minimum wage economy-wide –, as well as to the similar dynamics of unit wage costs in industry, which had posted only a mild decrease at the beginning of Q3 from the previous quarter’s average.
Moreover, it was observed that the mismatches between labour demand and supply in some sectors, as well as the public sector wage dynamics could generate, in the near future as well, additional pressures on wages and labour costs in the private sector. In the opposite direction could act, however, more visibly the relative weakening of demand, particularly external demand, as well as the downward path of the inflation rate, alongside the higher resort by employers to workers from outside the EU, but also to technology integration, several Board members reiterated.
Turning to financial conditions, Board members remarked that the main interbank money market rates had fallen again in August, immediately after the NBR cutting the key interest rate and the interest rates on standing facilities, and had subsequently remained steady. It was noted that long-term yields on government securities had steepened their downward course in the first 10-day period of August, similarly to those in advanced economies and in the region – amid investors’ revised expectations on the Fed’s interest rate path –, but had then re-embarked on a markedly upward path, accumulating a significant rise, corrected however relatively abruptly in the closing days of September.
Against that background, after the downward adjustment in July, the EUR/RON exchange rate had returned in August to the higher values prevailing in Q2 and had tended to stay there until end-Q3, reflecting inter alia the renewed heightening of volatility on the international financial market, under the impact of stronger tensions in the Middle East. The USD/RON had re-entered, nevertheless, and stayed until end-September on a generally downward course, given the former’s movements on international financial markets.
Risks to the behaviour of the leu’s exchange rate remained significant, Board members deemed, referring to the large twin deficits and to the high uncertainties surrounding the fiscal consolidation process, amid inter alia the electoral context, but also to global economic developments and escalating geopolitical tensions.
At the same time, it was observed that the annual growth rate of credit to the private sector had picked up further in the first two months of Q3, to 7.7 percent in August from 6.7 percent in June, mainly due to the faster rise in domestic currency loans to households, primarily driven by consumer credit, whose flow had reached a historical high in July. The pace of increase of loans to non-financial corporations had also continued to step up during the period overall, prompted solely by the leu-denominated component, whose faster dynamics had been influenced decisively by credit under government programmes, several members pointed out. Conversely, the rate of change of the foreign currency component had resumed its decrease. Under the circumstances, the share of leu-denominated loans in credit to the private sector had widened more visibly, to 69.7 percent in August from 69.1 percent in June.
As for the near-term outlook, Board members remarked that, according to the new data and assessments, the annual inflation rate would decline until end-2024 on a fluctuating and higher path than that shown in the August medium-term forecast, which had seen it go down to 4.0 percent in December 2024, to 3.4 percent at end-2025, and to 3.2 percent in June 2026.
It was shown that the decrease would be largely driven by supply-side factors. Their disinflationary action, stemming primarily from base effects, would however continue to be weaker over the very short term than previously anticipated, amid the opposite effects exerted on food and energy price dynamics by the unfavourable weather conditions in 2024 and the increase in some commodity prices, Board members noted. Moreover, it was observed that additional inflationary influences would also come from tobacco products, given the unexpected rise in their prices recently, whereas fuel price dynamics would probably stay less inflationary in the following months than anticipated in August.
Nevertheless, significant uncertainties were further associated with the anticipated developments in energy and food prices, inter alia amid the legislative changes in the field, as well as with the future path of crude oil prices in view of geopolitical tensions, Board members deemed.
It was agreed that underlying inflationary pressures were however expected to be more moderate than in the prior forecast and to ease somewhat markedly in the very short run, given the likely decrease of excess aggregate demand in 2024 H2 to significantly lower-than-previously envisaged values, yet amid private consumption growth staying solid and the dynamics of unit labour costs sticking to very high levels. At the same time, obvious disinflationary effects would probably stem over that time horizon from the slacker growth rate of import prices, as well as from the 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 somewhat more modest quarterly increases of the economy for 2024 H2 than previously envisaged, but on a gradual step-up, implying also a rise in annual GDP dynamics during that period overall.
It was observed that, according to high-frequency indicators, private consumption had probably continued to be the main driver of annual economic growth during Q3, while a new positive contribution, albeit on the wane, could come from gross fixed capital formation. At the same time, the contractionary influence of net exports appeared to be only slightly diminished, as the annual change in the exports of goods and services had seen the negative differential with that of imports narrow somewhat in July, recording a relatively more pronounced advance and thus returning comfortably into positive territory. Against that background, the annual increases in the trade deficit and the current account deficit had moderated compared to the previous quarter’s averages, yet had remained particularly fast-paced, Board members pointed out.
Board members emphasised the high uncertainties and risks stemming from the fiscal and income policy stance in 2024, given the budget execution in the first eight months of the year and the characteristics of the recent budget revision, including the raising of the fiscal deficit target. Over a longer time horizon, high uncertainties and risks were conversely associated with the fiscal and budgetary measures that could be implemented in the future for budget consolidation purposes, in the context of the medium-term fiscal-structural plan that would presumably be submitted to the EC in the autumn of 2024, in line with the new EU economic governance framework, according to Board members.
It was agreed, moreover, that heightened uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, stemmed from the war in Ukraine and the Middle East conflict, as well as from the economic performance in Europe and globally, in the context of escalating geopolitical tensions.
Also from that perspective, Board members underscored 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 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 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.