In a surprising move in its meeting today, 7 August, the Board of the National Bank of Romania decided to cut the monetary policy rate to 6.50 percent per annum from 6.75 percent, effective 8 August 2024. The central bank also lowered the lending (Lombard) facility rate to 7.50 percent per annum from 7.75 percent and the deposit facility rate to 5.50 percent per annum from 5.75 percent, while maintaining the existing minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The annual adjusted CORE2 inflation rate also fell faster than anticipated in Q2, reaching 5.7 percent in June from 7.1 percent in March 2024. This deceleration was due to disinflationary base effects and reductions in commodity prices, along with decreasing import prices and slightly declining short-term inflation expectations. However, rising unit labor costs in early 2024 had a moderate opposing impact, partially passed on to consumer prices amid strong demand for goods,” says a BNR press release.
The annual inflation rate, based on the Harmonised Index of Consumer Prices (HICP), dropped to 5.3 percent in June from 6.7 percent in March 2024. The average annual CPI inflation rate fell to 7.2 percent in June from 8.5 percent in March 2024, while the average annual HICP inflation rate decreased to 7.3 percent in June from 8.3 percent in March 2024.
Economic activity grew by 0.7 percent in Q1 2024, below expectations, likely reducing excess aggregate demand. Annual GDP growth significantly slowed in Q1 2024 to 0.5 percent from 3.0 percent in Q4 2023, mainly due to a sharp decline in gross fixed capital formation, although household consumption continued to rise.
Net exports exerted a larger contractionary influence in Q1 2024, with a slight increase in the gap between import and export volumes. The trade deficit’s annual growth rate increased marginally, while the current account deficit decreased significantly, partly due to a strong rise in the secondary income surplus from EU fund inflows.
Recent data suggests stronger-than-expected quarter-on-quarter economic growth in Q2 2024, indicating a notable increase in annual GDP dynamics. In April-May, retail and motor vehicle sales growth rates increased compared to Q1, manufacturing output slightly rebounded, and construction activity saw a significant positive shift. However, imports continued to outpace exports, deepening the trade and current account deficits.
In May 2024, the number of employees contracted after a substantial rise in April, while the ILO unemployment rate gradually increased to 5.5 percent from April to June, below the 5.6 percent average in H2 2023. July surveys indicated more moderate short-term employment intentions and a declining labor shortage, contrary to the rising shortage reported in early 2024. The growth rate of nominal gross wages and unit labor costs in industry slowed in April-May but remained high.
Interbank money market rates declined in early July following the NBR’s rate cuts and then stabilized. Long-term government securities yields followed a downward trend, aligning with global trends and improved investor expectations, affecting global risk appetite. The EUR/RON exchange rate corrected downward in early July and remained stable before rising amid increased international financial market volatility due to Middle East tensions.
Private sector credit growth accelerated to 6.7 percent in June from 5.7 percent in May, driven by domestic currency loans to non-financial corporations, while foreign currency credit showed mild, fluctuating growth. The share of leu-denominated loans rose to 69.1 percent in June from 68.8 percent in May.
Today, the NBR Board approved the August 2024 Inflation Report, incorporating the latest data. The updated forecast indicates a lower-than-expected annual inflation rate, especially in the near term, with a significant decline by end-2024 and Q1 2025. After a temporary rise in Q2 2025, the rate is expected to stay slightly below the upper target band, lower than previous projections. The decline is driven by supply-side factors, base effects, legislative changes in the energy sector, reduced short-term inflation expectations, slower import price growth, and a mild contraction of excess aggregate demand.
Uncertainties and risks remain high, stemming from fiscal and income policies, public sector wage dynamics, the impact of the new pension law, and future fiscal measures. Labor market conditions and wage dynamics also pose significant uncertainties. Energy and food price developments, geopolitical tensions, and the economic performance in Europe add further risks. The absorption of EU funds, crucial for structural reforms and mitigating geopolitical conflicts’ impacts, also carries uncertainties.
Monetary policy decisions by the ECB, the Fed, and regional central banks are also relevant. Considering the improved near-term inflation outlook but high longer-term uncertainty, the NBR Board decided to cut the monetary policy rate to 6.50 percent per annum from 6.75 percent, effective 8 August 2024. The lending (Lombard) facility rate was lowered to 7.50 percent per annum from 7.75 percent, and the deposit facility rate to 5.50 percent per annum from 5.75 percent. Minimum reserve requirement ratios for leu- and foreign currency-denominated liabilities were maintained.
These decisions aim to ensure medium-term price stability and sustainable economic growth. The NBR emphasizes the importance of a balanced macroeconomic policy mix and structural reforms, including the use of EU funds, to preserve stability and strengthen the economy’s resilience.
The NBR will closely monitor domestic and international developments and is ready to use its tools to achieve medium-term price stability and financial stability. The new quarterly Inflation Report will be presented on 9 August 2024, and the minutes of today’s meeting will be posted on 20 August 2024.
The next monetary policy meeting will be on 4 October 2024.