Central bank keeps the monetary policy rate at 6.50%

In its meeting of 14 February 2025, the Board of the National Bank of Romania decided to keep the monetary policy rate at 6.50 percent per annum. BNR also left unchanged the lending (Lombard) facility rate at 7.50 percent per annum and the deposit facility rate at 5.50 percent per annum and maintained the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

BNR pointed out that the annual inflation rate exceeded expectations in the last three months of 2024, rising to 5.14 percent in December from 4.62 percent in September. This increase was primarily driven by higher fuel prices and further hikes in food prices due to the severe summer drought and rising commodity costs.

The annual adjusted CORE2 inflation rate halted its downward trend in Q4 2024, remaining at 5.6 percent until December. This stagnation resulted from opposing influences: disinflationary base effects in non-food sub-components and declining import price dynamics on one side, and rising agricultural commodity prices and higher wage costs, partly passed onto consumers, on the other.

Over 2024, the 12-month inflation rate dropped by 1.47 percentage points to 6.61 percent in December, mainly due to a 2.8 percentage point decrease in the adjusted CORE2 inflation rate. However, non-food inflation and market service prices remained elevated. Additional disinflationary influences came from slower growth in administered prices, though rising fuel, energy, and tobacco prices had an opposite effect.

Inflation measured by the Harmonised Index of Consumer Prices (HICP) fell to 5.5 percent in December 2024 from 7.0 percent a year earlier. The average annual CPI inflation rate declined from 10.4 percent in 2023 to 5.6 percent in 2024, while the average HICP inflation rate decreased from 9.7 percent to 5.8 percent over the same period.

In January 2025, the annual inflation rate fell to 4.95 percent, largely due to substantial base effects within adjusted CORE2 inflation, which declined to 5.1 percent. Consequently, the average annual CPI inflation rate dropped further to 5.4 percent.

Preliminary data suggest stronger-than-expected economic growth in Q4 2024, with quarterly GDP expansion accelerating to 0.8 percent from 0.1 percent in Q3. However, annual GDP growth slowed to 0.7 percent from 1.2 percent in Q3 due to mixed demand-side developments. Retail sales growth accelerated in Q4, while construction activity saw a sharper decline. The negative trade balance narrowed slightly as exports contracted at a slower pace than imports, though the current account deficit widened due to deteriorating income balances.

On the labor market, employment growth accelerated in October-November 2024, while the ILO unemployment rate fell to 5.2 percent in December from an average of 5.6 percent in Q3. Surveys indicate a significant recovery in hiring intentions in January 2025, following a three-quarter decline. Labor shortages increased, reversing the contraction seen in late 2024. Nominal gross wage growth and unit labor costs in industry remained in double digits despite declining from their Q3 peaks of 16.7 percent and 18.6 percent, respectively.

Interbank money market rates increased slightly in mid-January 2025 before stabilizing. Long-term government bond yields continued their steep rise early in the month but saw a sharp correction by month-end, reflecting improved global risk appetite and reduced investor concerns over fiscal consolidation following the announcement of Romania’s 2025 budget plan. The EUR/RON exchange rate remained stable at its mid-2024 levels, while the RON initially weakened against the USD before recovering.

Private sector credit growth edged up to 8.9 percent in December 2024 from 8.8 percent in November, driven by household credit expansion. The share of leu-denominated credit remained stable at 70.1 percent.

At its 14 February 2025 meeting, the NBR Board reviewed and approved the February Inflation Report. The updated forecast indicates that the annual inflation rate will fluctuate markedly in H1 2025 due to base effects before declining in H2, though remaining above the target range until year-end. It is expected to dip slightly below the upper bound of the target range in early 2026 and then stabilize just below previous projections.

Disinflationary pressures will stem from base effects, slower import price growth, and downward adjustments in short-term inflation expectations. These factors will be supplemented by the negative output gap, which is expected to widen in 2025 before gradually narrowing.

Significant risks remain regarding fiscal policy, given the impact of ongoing corrective measures and the need for budget consolidation under the National Medium-Term Fiscal-Structural Plan agreed with the European Commission. Wage dynamics and labor market conditions also present uncertainties, as do future energy and food price movements. The global economic environment, geopolitical conflicts, and trade protectionism trends pose additional risks.

Based on current data and heightened uncertainty, the NBR Board decided to keep the monetary policy rate at 6.50 percent per annum. The lending facility rate remains at 7.50 percent, while the deposit facility rate stays at 5.50 percent. Minimum reserve requirement ratios for credit institutions remain unchanged.

The NBR Board emphasizes the importance of a balanced macroeconomic policy mix and structural reforms, supported by EU funds, to ensure economic stability and resilience. The central bank remains vigilant and prepared to use its policy tools to maintain price stability and safeguard financial stability.

The new Inflation Report will be presented on 17 February 2025 at 11:00 a.m. The minutes of the 14 February meeting will be published on 26 February at 3:00 p.m. The next NBR Board monetary policy meeting is scheduled for 7 April 2025.