BNR Board decisions on monetary policy

In its meeting of 15 January 2025, the Board of the National Bank of Romania (BNR) decided the following:   to keep the monetary policy rate at 6.50 percent per annum; 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; to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.       The annual inflation rate rose higher than expected over the past three months of 2024, up to 5.14 percent in December, from 4.62 percent in September. The advance versus end-Q3 was driven mainly by higher fuel prices – primarily as a result of the significant appreciation of the US dollar on the international financial market –, and to a small extent by the new increases in food prices, amid the severe drought in the summer of 2024 and the hike in some commodity prices.   At the same time, the annual adjusted CORE2 inflation rate saw a halt in its downward trend in 2024 Q4, remaining flat at 5.6 percent until December, i.e. a level similar to that at end-Q3. This was ascribable to the opposite influences coming over this period, on the one hand, from the disinflationary base effects in non-food sub-components and from the decline in import price dynamics, and, on the other hand, from the hike in some agri-food commodity prices, as well as from higher wage costs passed through, at least in part, into some consumer prices, inter alia amid still high short-term inflation expectations and a robust demand for goods.   Annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went up to 5.5 percent in December from 4.8 percent in September 2024. Nevertheless, the average annual CPI inflation rate fell to 5.6 percent in December from 6.1 percent in September 2024. In turn, the average annual HICP inflation rate decreased to 5.8 percent in December 2024 from 6.4 percent in September.   Economic activity stalled in 2024 Q3, after increasing by 0.1 percent in the previous three months (quarterly change), which makes it likely for excess aggregate demand to have further narrowed over this period too.   Annual GDP growth stepped up to 1.2 percent in 2024 Q3 from 0.9 percent in the previous quarter. The annual rate of increase of household consumption remained fast-paced over this period, albeit it slowed down compared to Q2, while the annual dynamics of gross fixed capital formation continued to see a relatively steep decline, reaching a nine-quarter low.   Net exports exerted, however, a considerably lower contractionary impact in 2024 Q3 amid a somewhat faster decrease in the annual change in the import volume of goods and services, which nevertheless remained in positive territory. Consequently, the trade deficit and current account deficit posted significantly slower annual growth rates compared to the previous quarter.   The latest data and analyses point to moderate quarterly economic growth in 2024 Q4, in line with previous forecasts, as well as to mixed developments across the main aggregate demand components and major sectors compared to the same year-ago period.   Thus, in October compared to the 2024 Q3 average, the annual growth rate of retail sales and especially that of motor vehicles and motorcycles sales picked up, and the annual dynamics of services to households returned to positive territory, while the volume of construction works posted a markedly stronger annual decline. At the same time, the annual change in exports of goods and services rose slightly in October-November 2024, narrowing its negative differential with that in imports thereof, as the latter remained unchanged. Against this background, the trade deficit continued to see a slower annual increase, whereas the current account deficit posted a considerably swifter widening, as a result of the deterioration of income balances.   Looking at the labour market, the number of employees economy-wide resumed its monthly increase in September and continued to grow at a relatively fast pace in October 2024, while the ILO unemployment rate fell to 5.4 percent in October and 5.3 percent in November, after rising to an average of 5.6 percent in Q3. Furthermore, the surveys indicate that employment intentions over the very short horizon saw a halt in their decline in October and remained stable in November-December, thus reflecting a slower quarterly decrease, while the labour shortage reported by companies shrank more visibly in 2024 Q4 as a whole. The two-digit annual growth rate of the nominal gross wage and, in particular, that of unit labour costs in industry declined in October, yet remained elevated after rising to 16.7 percent and 18.6 percent respectively in 2024 Q3.   The main interbank money market rates witnessed sizeable increases in the second part of November and then held relatively steady. Long-term yields on government securities steepened and extended their upward course until the closing 10-day period of December 2024. This occurred in the context of the high volatility of the global risk appetite, but also amid the uncertainty associated with the electoral events in November and early December, conducive to a temporary rise in financial investor concerns about the fiscal and external positions of the economy. The EUR/RON exchange rate remained broadly stable in November and December, at the higher values it had returned to in mid-Q3. In relation to the US dollar, the leu continued, nevertheless, to depreciate markedly during both months, as the former strengthened visibly on international financial markets over this period.   The annual growth rate of credit to the private sector continued to pick up during the first two months of 2024 Q4 overall, reaching 8.8 percent in November from 8.4 percent in September, primarily due to the further step-up in the dynamics of leu-denominated credit to households, mainly on account of housing loans. The share of the domestic currency component in credit to the private sector thus widened to 70.2 percent in November from 69.8 percent in September.   The new assessments reconfirm the prospects for the annual inflation rate to decline in the first three months of 2025, yet on a higher-than-previously-anticipated path. The decrease will result primarily from sizeable base effects and the deceleration in import price growth, yet amid the persistence of opposite effects exerted on food and energy price dynamics by the 2024 unfavourable weather conditions and by the increase in some commodity prices, as well as by the higher energy consumption over the winter months.    Considerable uncertainties and risks stem from the future fiscal and income policy stance, given the implementation at the onset of 2025 of the package of fiscal-budgetary measures approved recently for budget consolidation purposes in the context of the National Medium-Term Fiscal-Structural Plan agreed with the European Commission and of the excessive deficit procedure. Labour market conditions and wage dynamics in the economy, however, also remain a source of uncertainties and risks. At the same time, significant uncertainties are further associated with developments in energy and food prices, as well as with the future path of crude oil prices amid geopolitical tensions.   Heightened uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, arise from the war in Ukraine and the Middle East conflict, as well as from the economic performance in Europe and globally, in the context of escalating geopolitical tensions. Furthermore, the absorption and use of EU funds, especially those under the Next Generation EU programme, are conditional on fulfilling strict milestones and targets. However, they are essential for carrying out the necessary structural reforms, energy transition included, as well as for counterbalancing, at least in part, the contractionary impact exerted by geopolitical conflicts.   The ECB’s and the Fed’s monetary policy decisions, as well as the stance of central banks in the region, are also relevant.   Based on the currently available data and assessments, as well as in light of the elevated uncertainty, theBNR Board decided in the meeting held today, 15 January 2025, to keep the monetary policy rate at 6.50 percent per annum. Moreover, it decided 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. Furthermore, the BNR Board decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.   The BNR Board decisions aim to ensure and maintain price stability over the medium term, in a manner conducive to achieving sustainable economic growth. TheBNR Board reiterates that, 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 BNR closely monitors developments in the domestic and international environment and stands ready to use the tools at its disposal in order to achieve the fundamental objective regarding medium-term price stability, while safeguarding financial stability.   The account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on theBNR’s website on 28 January 2025 at 3:00 p.m.   The next monetary policy meeting of the BNR Board will be held on 14 February 2025.