In its meeting of 5 July 2024, the Board of the National Bank of Romania decided the following:
- to cut the monetary policy rate to 6.75 percent per annum from 7.00 percent per annum starting 8 July 2024;
- to lower the lending (Lombard) facility rate to 7.75 percent per annum from 8.00 percent per annum and the deposit facility rate to 5.75 percent per annum from 6.00 percent per annum;
- to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The annual inflation rate saw 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.
The annual adjusted CORE2 inflation rate continued to decrease gradually, in line with forecasts, down to 6.3 percent in May from 7.1 percent in March 2024. Behind the deceleration stood, during this period as well, disinflationary base effects and corrections of agri-food commodity prices. Additional influences stemmed from the decreasing dynamics of import prices and from short-term inflation expectations re-embarking on a slight downtrend. A moderate opposite impact had the new increases in unit labour costs recorded in the first months of 2024, which were passed through, at least in part, into the prices of some goods and services, inter alia amid a robust consumer demand that increased strongly in April.
The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 5.8 percent in May 2024 from 6.7 percent in March 2024. At the same time, the average annual CPI inflation rate and the average annual HICP inflation rate decreased in May to 7.6 percent from 8.5 percent and 8.3 percent respectively in March 2024.
In 2024 Q1, economic activity expanded by 0.4 percent, to a lower extent than anticipated, after its 0.6 percent contraction in 2023 Q4, which makes it likely for excess aggregate demand to have further narrowed over this period, contrary to expectations.
Moreover, annual GDP growth contracted markedly in 2024 Q1 to 0.1 percent from 3.0 percent in the previous three months. The decline was driven this time round mainly by gross fixed capital formation, whose annual dynamics plummeted from the very high two-digit level seen in 2023 Q4, whereas household consumption continued to witness a faster annual growth.
Net exports exerted a larger contractionary influence in 2024 Q1, against the backdrop of a slight pick-up in the differential between the positive dynamics in the import volume of goods and services and the change in the export volume, which remained in negative territory. However, the annual growth rate of the trade deficit remained unchanged, while that of the current account decreased considerably from the previous quarter, given, inter alia, the strongly faster increase in the secondary income surplus during this period, mainly on account of inflows of EU funds to the current account.
The latest data and analyses point to a notable quarter-on-quarter economic growth in 2024 Q2, visibly more robust than previously anticipated, implying a marked step-up in the annual GDP dynamics.
Thus, in April 2024, the annual growth rate of retail sales and that of motor vehicles and motorcycles sales surged compared to the 2024 Q1 averages, industrial output posted a strong revival, while the dynamics in the volume of construction works climbed again to a two-digit level, after falling to a significant negative value in the first three months of 2024 overall. However, the annual change in the imports of goods and services posted a notably larger positive differential with that in exports, given its relatively stronger increase reported in April. Consequently, the trade deficit recorded a significantly faster deepening in annual terms, whereas the current account deficit doubled versus the same year-earlier period, inter alia amid the worsening of the primary and secondary income balances.
Looking at the labour market, in April 2024 the number of employees economy-wide resumed its monthly increase at a swift pace, while the ILO unemployment rate advanced only slightly in April-May to 5.4 percent, remaining below the average 5.6 percent level seen over the last two quarters of the previous year. The two-digit annual growth rate of the nominal gross wage continued to rise in the first three months of 2024 as a whole, remaining unchanged in April, while the dynamics of unit labour costs in industry were further particularly elevated in 2024 Q1, before posting a sharp decline in April, albeit mainly owing to a calendar effect. At the same time, employment intentions over the very short horizon followed a steeper upward trend in Q2 overall, their substantive drop in June notwithstanding, while the labour shortage reported by companies widened again quarter on quarter, according to the latest surveys.
The main interbank money market rates remained stable in May and then posted slight declines. Long-term yields on government securities witnessed a moderate downward adjustment in mid-Q2, but then climbed and stuck to the higher readings seen in April. This 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 entailed shifts in global financial market sentiment and in the risk perception towards the region. Against this background, the EUR/RON exchange rate stayed in May-June at the higher levels it had returned to in the second part of April.
The annual growth rate of credit to the private sector picked up to 5.8 percent in April, after having fallen to 4.7 percent in March, while in May it remained relatively steady at 5.7 percent, as the domestic currency component continued to accelerate its rate of increase during this period and the dynamics of foreign currency credit re-entered a mildly upward, albeit fluctuating, path. Against this backdrop, the share of leu-denominated loans in credit to the private sector narrowed to 68.8 percent in May from 68.9 percent in March 2024.
According to current assessments, the annual inflation rate will decline further over the following months, on a significantly lower path than that shown in the May 2024 medium-term forecast, primarily due to base effects and legislative changes in the energy field, as well as amid the deceleration in import price growth and the gradual downward adjustment of short-term inflation expectations.
Heightened uncertainties and risks stem from the future fiscal and income policy stance, given on one hand the budget execution in the first five months of the year, the public sector wage dynamics and the full impact of the new law on pensions, and on the other hand the fiscal and budgetary measures that could be implemented in the future to carry on budget consolidation, inter alia amid the excessive deficit procedure and the conditionalities attached to other agreements signed with the EC. Labour market conditions and wage dynamics in the economy also remain a source of sizeable uncertainties and risks. Moreover, significant uncertainties are associated with the impact presumed to be exerted on natural gas and electricity prices by the recent legislative changes, as well as with the evolution of crude oil prices.
Uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, also continue to arise, nevertheless, from the war in Ukraine and the Middle East conflict, as well as from the economic performance in Europe, particularly in Germany. Furthermore, the absorption of EU funds, especially those under the Next Generation EU programme, is conditional on fulfilling strict milestones and targets. However, this is essential for carrying out the necessary structural reforms, energy transition included, as well as for counterbalancing, at least in part, the contractionary impact exerted by geopolitical conflicts.
The ECB’s and the Fed’s prospective monetary policy stances, as well as the conduct of central banks in the region, are also relevant.
Considering the latest available data and the prospects for the annual inflation rate to decline further over the following months, on a significantly lower path than previously anticipated, but also in light of the still elevated uncertainty, the NBR Board decided in the meeting held today, 5 July 2024, to cut the monetary policy rate to 6.75 percent per annum from 7.00 percent per annum starting 8 July 2024. Moreover, it decided to lower the lending (Lombard) facility rate to 7.75 percent per annum from 8.00 percent per annum and the deposit facility rate to 5.75 percent per annum from 6.00 percent per annum. Furthermore, the NBR Board decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The NBR Board decisions aim to ensure and maintain price stability over the medium term, in a manner conducive to achieving sustainable economic growth. The NBR Board reiterates that, at the current juncture, 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, are of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand adverse developments.
The NBR closely monitors developments in the domestic and international environment and stands ready to use the tools at its disposal in order to achieve the fundamental objective regarding medium-term price stability, while safeguarding financial stability.
The account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the NBR’s website on 17 July 2024 at 3:00 p.m.
The next monetary policy meeting of the NBR Board will be held on 7 August 2024.