BNR:Economic growth expected to accelerate progressively in 2024 and 2025

Economic growth is expected to accelerate progressively in 2024 and 2025, and somewhat more pronounced than anticipated, in the conditions of the tempering of inflation and the gradual recovery of external demand, but especially against the background of the conduct of fiscal policy and the use of European funds related to the Next Generation EU instrument, the members of the Board of Directors of the National Bank of Romania (BNR) say, according to the Minutes of the Board of Directors meeting on monetary policy issues of May 13, 2024, published on Wednesday.According to the source, household consumption is expected to return this year and remain the main determinant of the GDP advance in 2025, in the context of substantial increases in wages and social transfers superimposed on the downward trend of the inflation rate, but also in the conditions of the real levels of interest rates at credits and deposits of the population.A significant contribution to economic growth will probably continue to come from the gross fixed capital formation, whose dynamics are expected to decrease sharply in the 2024-2025 interval, after the large growth in 2023, but to remain particularly high from the historical outlook, the document reads.The BNR Minutes also show that the investment activity will continue to be supported by the attraction and use of European funds, in a significant volume, but decreasing compared to 2022-2023; net export will contract, and its contribution to GDP dynamics will remain negative in 2025; the current account deficit is likely to sharply slow its downward correction as a share of GDP in 2024-2025 and will therefore remain well above European standards, continuing to constitute a major vulnerability and induce risks to inflation, the sovereign risk premium and, finally, of the sustainability of economic growth.Uncertainties and increased risks stem from the conduct of fiscal and revenue policies, having as sources in 2024 the result of the budget execution from the first months of the year, the dynamics of wages in the public sector and the full impact of the new pension law, to which is added the average-term inflation's evolution, the war in Ukraine and the conflict in the Middle East, as well as the economic developments in Europe, especially in Germany.The annual inflation rate is expected to decrease in December 2024 to 4.9 percent, compared to the level of 4.7 percent previously anticipated, and to decrease only marginally within the target range at the end of the projection horizon, respectively to 3.4 percent in March 2026, in line with previous forecasts.At the same time, the increase in the unit labour cost is expected to moderate slightly in the current year, remaining noticeably more alert, and its transfer, at least partially, into consumer prices could be favoured by the situation of consumer demand in different segments, several members of the Council said.The Board of Directors of the National Bank of Romania decided, in the meeting of May 13, to maintain the monetary policy interest rate at the level of 7% per year.Also, the BNR Board agreed to keep the interest rate for the lending facility (Lombard) at 8% per annum and the interest rate for the deposit facility at 6% per annum, but also to maintain the current levels of the mandatory minimum reserve rates for the liabilities in RON and in foreign currency of credit institutions.The key interest rate has been unchanged since January 2023, when the BNR increased the interest rate to 7% per annum, from 6.75% per annum.