NBR Board keeps the monetary policy rate at 7.00 percent per annum

Warning: Inflation to rise early next year amid tax increase.

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In its meeting of 8 November 2023, the Board of the National Bank of Romania decided to keep the monetary policy rate at 7.00 percent per annum and to leave unchanged the lending (Lombard) facility rate at 8.00 percent per annum and the deposit facility rate at 6.00 percent per annum. NBR also kept the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The annual inflation rate went down to 8.83 percent in September 2023, in line with forecasts, from 9.43 percent in August, amid the deceleration in the growth rate of processed food prices and the faster annual decline in energy prices.

In 2023 Q3, the 12-month inflation rate continued therefore to drop, albeit at a slower pace than in the previous two quarters, shedding 1.42 percentage points (from 10.25 percent in June), given that the further sharp decreases in the dynamics of food and energy prices during this period were partly counterbalanced, in terms of impact, by the hike in fuel and medicine prices.

The annual adjusted CORE2 inflation rate saw a faster decrease in Q3, falling visibly below the forecast to reach 11.3 percent in September from 13.5 percent in June. The developments are mainly ascribable to declining prices of commodities, primarily agri-food items, and to the measure to temporarily cap the mark-ups on basic food products. However, they also reflect a weaker pass-through of higher corporate costs, especially wage costs, into consumer prices – amid the slowdown in consumer demand –, as well as a lower inflationary impact of imports.

The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 9.2 percent in September from 9.3 percent in June 2023. Furthermore, the average annual CPI inflation rate and the average HICP inflation rate fell to 12.6 percent and 11.4 percent respectively in September from 14.2 percent and 12.5 percent respectively in June, remaining below the levels prevailing in the region and the Baltic countries.

Recently revised statistical data show that economic activity increased by 1.7 percent in 2023 Q2, after a 1.0 percent contraction in the previous three months (quarterly change), but reconfirm the decrease in its annual growth to 1.0 percent from 2.4 percent in 2023 Q1.

The decline was driven this time round by household consumption, whereas general government consumption posted a markedly faster expansion, and gross fixed capital formation reported only a slightly slower annual growth rate, but still particularly high. Moreover, net exports exerted a larger expansionary impact during this period, given the further widening of the positive differential between the dynamics of exports of goods and services, in terms of volume, and those of imports. Against this background, the trade and current account deficits recorded further substantial declines in 2023 Q2 compared to 2022 Q2.

The latest data and analyses point to a significant deceleration in economic growth in the latter part of 2023, implying a more modest annual GDP growth rate in Q3 than previously anticipated.

Thus, in July-August, retail trade and motor vehicles and motorcycles sales, as well as services to households reported further declines in their annual dynamics, while industrial output continued to see a marked fall in annual terms; in contrast, the annual increase in the volume of construction works re-accelerated considerably, mainly on account of developments in the non-residential and civil engineering segments. Moreover, the annual change in the exports of goods and services continued to widen its positive gap against that of imports, as the latter moved relatively deeper into negative territory in July-August. Consequently, the trade deficit saw its contraction in annual terms re-widen, while the current account deficit posted only a slightly lower annual drop, given that the substantial worsening in the primary income balance was partly offset, in terms of impact, by the increase during this period in the secondary income surplus.

Looking at the labour market, recent data show a visibly slower monthly increase in the number of employees economy-wide in July-August and a relative stability of the ILO unemployment rate, alongside a noticeable deceleration, during this period, in the annual dynamics of unit labour costs in industry, but from the particularly high level reached in Q2. In addition, the surveys indicate that employment intentions over the very short horizon declined at a mildly faster pace in October versus Q3, while the labour shortage reported by companies for the final quarter of the year largely reversed the rise seen in the previous quarter on account of developments in industry and services.

The main interbank money market rates posted slight declines towards end-October, after the relative stability in the previous months. Moreover, yields on government securities have steepened their downward correction recently, in line with developments in advanced economies and in the region. This occurred amid investors’ revised expectations on the Fed’s interest rate outlook and the soothing of fears generated on the international financial market in the first part of October by escalating geopolitical tensions.

Against this background, but also given the still high relative attractiveness of investments in domestic currency, the EUR/RON exchange rate quasi-stabilised at the higher readings reached in mid-September. Moreover, the leu stopped its depreciation trend versus the US dollar seen in prior months, amid the halt in the latter’s strengthening trend on international financial markets.

The annual growth rate of credit to the private sector lost momentum more visibly in September, reaching 4.5 percent from 5.5 percent in August, owing to a sizeable decline in the dynamics of the foreign currency component, counterbalanced only to a small extent, in terms of impact, by the slight re-acceleration of the pace of increase of credit in lei. However, the share of leu-denominated loans in credit to the private sector halted its rise in September, coming in at 68.1 percent, amid the statistical effect of developments in the EUR/RON exchange rate.

In today’s meeting, the NBR Board examined and approved the November 2023 Inflation Report, which incorporates the latest available data and information.

The updated forecast reconfirms the outlook for a further fall in the annual inflation rate over the next two years, albeit on a higher-than-previously-envisaged path in 2024, yet slightly lower during the subsequent quarters. Specifically, the annual inflation rate is expected to go up at the onset of 2024 – under the impact of the increase and introduction of some taxes and charges –, before declining gradually over the following quarters, but to accelerate its drop in 2025, falling inside the variation band of the target at the end of the projection horizon.

The decrease will continue to be driven by supply-side factors, primarily disinflationary base effects and downward adjustments in some commodity prices, alongside the influences expected to come from the relatively abrupt contraction of excess aggregate demand starting 2023 Q3 and from the output gap entering negative territory towards end-2024 – some quarters earlier than previously forecasted.

Sizeable uncertainties and risks to the inflation outlook stem, however, from the increases in taxes and charges aimed at furthering budget consolidation, potentially supplemented in the future, but also from the evolution of oil prices, in light of the Middle East conflict.

Notable uncertainties and risks are, nevertheless, further associated with the future fiscal and income policy stance, given the recent actions aimed at containing budget expenditures in 2023 and the possible broadening over the next years of the package of corrective fiscal and budgetary measures, but also the potential implications of the new legislation on pensions and wages in the public sector, as well as possible further pay rises in the budgetary sector.

At the same time, significant uncertainties and risks to the prospects for economic activity, implicitly the medium-term inflation developments, arise from the war in Ukraine and the Middle East conflict, as well as from below-expectations economic performance in Europe, especially 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 of supply-side shocks, compounded also by the tightening of economic and financial conditions worldwide.

Also relevant are the ECB’s and the Fed’s prospective monetary policy conduct, as well as the stance of central banks in the region.

In the meeting held today, 8 November 2023, based on the currently available data and assessments, as well as in light of the elevated uncertainty, the NBR Board decided to keep the monetary policy rate at 7.00 percent per annum. Moreover, it decided to leave unchanged the lending (Lombard) facility rate at 8.00 percent per annum and the deposit facility rate at 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 bring the annual inflation rate back in line with the 2.5 percent ±1 percentage point flat target on a lasting basis, inter alia by anchoring inflation expectations over the medium term, in a manner conducive to achieving sustainable economic growth. 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 will continue to use the tools at its disposal to achieve the fundamental objective of price stability in the medium term.

The new quarterly Inflation Report will be presented to the public in a press conference on 10 November 2023 at 11:00 a.m. 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 20 November 2023 at 3:00 p.m.

In line with the calendar, the next monetary policy meeting of the NBR Board will be held on 12 January 2024.

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