Central bank keeps monetary policy rate at 6.50%

In its meeting of 8 November 2024, the Board of the National Bank of Romania decided to keep the monetary policy rate at 6.50 percent per annum and to leave unchanged the lending (Lombard) facility rate at 7.50 percent per annum and the deposit facility rate at 5.50 percent per annum. The central bank also agreed to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

In September, the annual inflation rate declined to 4.62 percent from 5.10 percent in August 2024, primarily due to lower fuel and energy costs, driven by a significant drop in crude oil prices. This decrease outweighed price increases for food and tobacco products observed this month.

Throughout Q3 of 2024, inflation continued to ease, though at a slower pace compared to the previous quarter and initial projections. By September, inflation fell by 0.32 percentage points from June (4.94 percent), influenced by reduced administered and fuel prices due to base effects and lower crude oil prices. However, rising food prices and slightly higher electricity costs, partially due to the severe drought, mitigated these declines.

Meanwhile, the adjusted CORE2 inflation rate decreased more gradually in Q3 than forecasted, reaching 5.6 percent in September from 5.7 percent in June. This decline stemmed from lower import prices and disinflationary effects in non-food items. Yet, this progress was offset by unfavorable statistical effects in processed foods, rising agricultural commodity prices, and increased wage costs impacting consumer prices amid strong demand and high short-term inflation expectations.

Using the Harmonised Index of Consumer Prices (HICP), Romania’s annual inflation dropped to 4.8 percent in September from 5.3 percent in June. The average annual CPI inflation rate decreased to 6.1 percent in September, down from 7.2 percent in June, while the HICP average fell to 6.4 percent from 7.3 percent.

Revised data reveals a 0.3 percent growth in economic activity in Q2 of 2024, following a 0.4 percent contraction in the previous quarter, implying a reduced excess demand during this period. GDP growth accelerated to 0.9 percent year-on-year in Q2 from 0.5 percent in Q1, mainly due to a boost in household consumption. However, gross fixed capital formation growth slowed, and net exports exerted a stronger drag as import volumes rose faster while exports declined. The trade and current account deficits widened considerably in Q2, impacted by declining EU fund inflows and other secondary income.

Latest analyses predict more modest economic gains for H2 of 2024 than initially expected, though with a gradual acceleration in annual GDP growth in Q3 due to varied trends in demand and major sectors. Notably, retail sales growth remained robust in July-August, with minor changes, while vehicle sales held steady. Conversely, industrial output saw a mild expansion in its annual contraction, and construction works dropped after a Q2 rebound. Import and export discrepancies narrowed, with exports rising strongly, thus easing trade and current account deficit growth compared to Q2.

The labor market experienced a slight rise in employment during June-July, stabilizing in August. Meanwhile, the ILO unemployment rate rose to 5.5 percent in Q3, after a decline to 5.1 percent in June. Q3 surveys indicate short-term stability in employment intentions for October, with labor shortages decreasing at the start of Q4. Wage growth remained high, expanding at 16.8 percent in July-August, while industrial unit labor costs rose to 17.8 percent.

Interbank rates remained stable in October, while long-term government securities yields climbed significantly, influenced by Fed rate expectations and global risk sentiment. Consequently, the EUR/RON exchange rate stayed stable at its mid-Q3 high, though the leu depreciated notably against the US dollar, reflecting global market trends.

Private sector credit growth picked up in September, with an annual increase of 8.4 percent, up from 7.7 percent in August, driven by domestic currency lending to corporations and households. The share of leu-denominated credit continued to expand, reaching 69.8 percent in September.

In its November 8, 2024, meeting, the NBR Board reviewed and approved the latest Inflation Report, which includes updated forecasts indicating a slight increase in inflation toward the year’s end, fluctuating markedly in H1 2025. Inflation is expected to remain above target, influenced by base effects, the 2024 drought, and rising commodity prices affecting food and energy.

By 2026, inflation is anticipated to fall below target, though on a higher-than-previously-forecasted path, as disinflationary effects and slowed import price growth counter excess demand. Yet, significant risks persist, including those related to fiscal policy, labor market conditions, and uncertainties around energy and food prices due to geopolitical conflicts.

Global tensions, especially from Ukraine and the Middle East, alongside economic activity in Europe, continue to pose risks for Romania’s economic outlook and inflation path. EU funds, crucial for reforms and economic resilience, depend on meeting Next Generation EU program targets.

Today, the NBR Board opted to maintain the policy rate at 6.5 percent, along with a 7.5 percent lending rate and a 5.5 percent deposit rate, while keeping minimum reserve ratios for leu- and foreign currency-denominated liabilities unchanged. These decisions aim to balance price stability with sustainable economic growth and reinforce Romania’s ability to manage adverse conditions.

The NBR will release its new quarterly Inflation Report on November 11, 2024, and the minutes of this policy meeting on November 20, 2024. The next NBR Board monetary policy meeting is scheduled for January 15, 2025.