Central Bank Board decisions on monetary policy

In its meeting of 4 October 2024, the Board of the National Bank of Romania 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 went up to 5.42 percent in July, from 4.94 percent in June, and then fell to 5.10 percent in August. The advance from end-H1 owes to the faster rise in food and energy prices amid the severe drought and the pick-up in the distribution tariffs for natural gas, which outweighed the impact of the new decreases in the dynamics of administered prices and fuel prices under the influence of base effects and the fall in crude oil prices.   At the same time, the annual adjusted CORE2 inflation rate saw a halt in its downward trend, climbing to 5.8 percent in August from 5.7 percent in June. This is attributable to an unfavourable statistical effect in the processed food segment and to the hike in some agri-food commodity prices, as well as to 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. These factors were largely offset by the disinflationary base effects in non-food sub-components and by the decrease in import price dynamics.   The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) stood at 5.3 percent in August 2024, a level similar to that in June 2024. Nevertheless, the average annual CPI inflation rate went down to 6.5 percent in August 2024 from 7.2 percent in June 2024. In turn, the average annual HICP inflation rate shrank to 6.7 percent in August 2024 from 7.3 percent in June 2024.   Economic activity posted a slower increase in Q2, to 0.1 percent from 0.5 percent in the previous three months (quarterly change), so that excess aggregate demand is likely to have further narrowed over this period, contrary to forecasts.   Annual GDP growth stepped up however in 2024 Q2, to 0.8 percent from 0.5 percent in the previous quarter, mainly as a result of the surge in the annual dynamics of household consumption. At the same time, the growth rate of gross fixed capital formation remained robust, although it continued to slow down compared to the prior quarter.   By contrast, net exports exerted a markedly larger contractionary influence, given that the volume of imports of goods and services recorded a faster increase, while the volume of exports continued to decline in annual terms. Consequently, the trade deficit and the current account deficit reported significantly faster dynamics, spurred in the latter case also by the considerable worsening of the secondary income balance, reflecting the developments in the inflows of EU funds to the current account.   The latest data and analyses point to weaker-than-previously-expected economic growth in Q3, albeit higher compared to the previous quarter, implying also a pick-up in annual GDP growth over this period amid mixed developments across the main aggregate demand components and major sectors.   Thus, in July 2024, the annual dynamics of retail sales remained strong, down only slightly compared to the Q2 average, with those of motor vehicles and motorcycles sales continuing to expand, whereas services to households witnessed a sharper year-on-year contraction. Moreover, industrial output stopped its decline in annual terms, while the volume of construction works contracted again compared to the same year-earlier period, after a relative recovery in Q2.   At the same time, the negative differential between the annual change in the exports of goods and services and that in the imports thereof narrowed somewhat as the former saw a relatively more pronounced advance in July, returning comfortably into positive territory. Against this background, the annual increases in the trade deficit and the current account deficit moderated compared to the previous quarter’s averages, yet remained particularly fast-paced.   Looking at the labour market, in June-July, the number of employees economy-wide recorded only a slight pick-up, while the ILO unemployment rate resumed its rise at the beginning of Q3, reaching 5.5 percent in August from 5.1 percent in June. At the same time, for Q3 as a whole, surveys point to a sharp decline in employment intentions over the very short horizon, as well as to a contraction in the labour shortage reported by companies. However, the two-digit annual growth rate of the nominal gross wage expanded in July, to 17.3 percent, after inching down in Q2, while that of unit labour costs in industry also remained high in the first month of Q3, albeit on a mild decrease from the previous quarter’s average.   The main interbank money market rates fell again in August, as a result of the NBR cutting the key interest rate and the interest rates on its standing facilities, and afterwards remained steady. Long-term yields on government securities steepened their downward course in the first 10-day period of August, similarly to those in advanced economies and in the region – amid investors’ revised expectations on the Fed’s interest rate path –, before witnessing a significant rise, which was however corrected relatively abruptly towards end-Q3. Against this background, after the downward adjustment in July, the EUR/RON exchange rate returned in August to the higher values prevailing in Q2 and tended to stay there until end-Q3, reflecting inter alia the renewed heightening of volatility on the international financial market, under the impact of stronger tensions in the Middle East.   The annual growth rate of credit to the private sector picked up further in the first two months of Q3, to 7.7 percent in August from 6.7 percent in June, mainly due to the faster rise in domestic currency loans to households, primarily driven by consumer credit. The share of the leu-denominated component in credit to the private sector widened more visibly, to 69.7 percent in August from 69.1 percent in June. According to current assessments, the annual inflation rate will decline until end-2024 on a fluctuating and higher path than that shown in the August 2024 medium-term forecast.   The decrease will result primarily from base effects and the deceleration in import price growth, whereas in the opposite direction will continue to act this year’s unfavourable weather conditions and the increase in some commodity prices, mainly via the effects exerted on food and energy price dynamics.   High uncertainties and risks stem from the fiscal and income policy stance, given on one hand the budget execution in the first eight months of the year and the characteristics of the recent budget revision, and on the other hand the fiscal and budgetary measures that could be implemented in the future for budget consolidation purposes, in the context of the medium-term fiscal-structural plan that will presumably be submitted to the EC in the autumn of this year. Labour market conditions and wage dynamics in the economy 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, stem 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 European 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, the NBR Board decided in the meeting held today, 4 October 2024, 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 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 ensure and maintain price stability over the medium term, in a manner conducive to achieving sustainable economic growth. The NBR 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 NBR 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 the NBR’s website on 11 October 2024 at 3:00 p.m.   In line with the announced calendar, the next monetary policy meeting of the NBR Board will be held on 8 November 2024.