National Bank of Romania Board decisions on monetary policy

In its meeting of 14 February 2025, 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 rose above expectations over the last three months of 2024 to reach 5.14 percent in December, from 4.62 percent in September, mainly as a result of the pick-up in the prices of fuels, but also following new hikes in food prices amid the severe drought in the summer of 2024 and the rise in some commodity prices. In turn, the annual adjusted CORE2 inflation rate saw a halt in its downward trend in 2024 Q4, remaining flat until December at the level posted at end-Q3, i.e. 5.6 percent.   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.   In 2024, the 12-month inflation rate shed 1.47 percentage points (from 6.61 percent in December 2023), amid the drop in the annual adjusted CORE2 inflation rate by 2.8 percentage points (from 8.4 percent in December 2023), mainly on account of the non-food sub-group, the dynamics of which remained however elevated, the same as the growth rate of market services prices. Additional disinflationary influences stemmed from the slower growth rate of administered prices, while opposite effects came from the dynamics of fuel and energy prices and, to a lower extent, from the developments in VFE and tobacco product prices.   The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 5.5 percent in December 2024 from 7.0 percent in December 2023. The average annual CPI inflation rate dropped to 5.6 percent in December 2024 from 10.4 percent in December 2023. In turn, the average annual HICP inflation rate decreased to 5.8 percent in December 2024 from 9.7 percent in December 2023. In January 2025, the annual inflation rate declined to 4.95 percent, primarily under the impact of substantial base effects visible in adjusted CORE2 inflation, whose annual rate decreased to 5.1 percent. Under the circumstances, the average annual CPI inflation rate fell to 5.4 percent in January 2025.   Preliminary data point to a stronger-than-envisaged quarterly growth of the economy in 2024 Q4 and to its sharp acceleration to 0.8 percent from 0.1 percent in the previous quarter. This implies a decline in the annual GDP dynamics to 0.7 percent in 2024 Q4 from 1.2 percent in the previous quarter amid mixed developments across aggregate demand components, as suggested by high-frequency indicators.   Thus, the growth rate of retail sales accelerated in 2024 Q4 as a whole, while the volume of construction works posted a visibly steeper decline in October-November compared to the same year-earlier period. In 2024 Q4, the annual change in exports of goods and services further narrowed its unfavourable differential with that in imports, which contracted somewhat more markedly. Against this background, the trade deficit continued to see a slower annual increase, whereas the current account deficit recorded a considerably swifter widening amid the sharp deterioration of income balances.    Looking at the labour market, the number of employees economy-wide picked up faster in October-November 2024 than in the prior quarter, while the ILO unemployment rate fell over the last three months of 2024 to 5.2 percent in December, 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 significant recovery in January 2025, after a three-quarter decline, while the labour shortage reported by companies widened, reversing almost entirely the marked contraction seen in the last quarter of 2024. The annual growth rate of the nominal gross wage and, in particular, that of unit labour costs in industry declined in 2024 Q4, yet remained in the two-digit range after rising to 16.7 percent and 18.6 percent respectively in the previous quarter.   The main interbank money market rates witnessed mild increases in the second 10-day period of January 2025 and then held relatively steady. Long-term yields on government securities extended their steep upward course in the first part of January, before posting a sharp downward correction towards the end of the month, reflecting the improvement in the global risk appetite, but also amid the lowering of financial investor concerns about budget consolidation prospects after the authorities announced the draft budget coordinates for 2025. Against this background, the EUR/RON exchange rate remained broadly stable in January 2025 at the higher values it had returned to in mid-Q3 of 2024. In relation to the US dollar, the leu continued to weaken relatively swiftly in the first part of January, but then recovered the ground lost, as a result of the former’s performance in international financial markets.    The annual growth rate of credit to the private sector edged up in December 2024, to 8.9 percent from 8.8 percent in November, as the further step-up in the dynamics of household credit was accompanied by a standstill in the pace of increase of loans to non-financial corporations. The share of the domestic currency component in credit to the private sector halted its upward trend, narrowing to 70.1 percent in December 2024 from 70.2 percent in November.   In today’s meeting, the NBR Board examined and approved the February 2025 Inflation Report, which incorporates the latest available data and information.   According to the updated forecast, the annual inflation rate will fluctuate markedly in 2025 H1 – amid the two-way base effects that will be manifest over this time horizon –, before declining in H2 on a higher path than in the prior projection, staying above the variation band of the target until end-2025. Moreover, after falling in the early months of 2026 slightly below the upper bound of the target band, the annual inflation rate will remain constant until the end of the forecast horizon, only marginally lower than previously projected.   The decrease will be driven by disinflationary base effects and by influences coming from the deceleration in import price growth, as well as from the downward adjustment of short-term inflation expectations, on a higher path, however, than in the previous projection. To these will add the lagged disinflationary effects from the negative output gap anticipated to open and to widen moderately during the current year, but to narrow gradually afterwards.   Uncertainties and risks further stem from the future fiscal policy stance, given on one hand the presumed impact of the corrective fiscal and budgetary measures implemented or adopted so far and, on the other hand, the budget consolidation requirement according to the National Medium-Term Fiscal-Structural Plan agreed with the European Commission and to the excessive deficit procedure.   Labour market conditions and wage dynamics in the economy also remain a source of uncertainties and risks. Moreover, significant uncertainties are further associated with the growth rates of energy and food prices, as well as with the future path of crude oil prices, while notable risks come from the expansion trend of trade protectionism, potentially impacting other commodity prices and the prices of some intermediate and final goods.   Heightened uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, arise from the war in Ukraine and the situation in the Middle East, but especially from developments in the global/euro area economy and in international trade amid the trade policy measures of the US administration. 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 and budget consolidation. 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, 14 February 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 NBR Board decided to maintain 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 new quarterly Inflation Report will be presented to the public in a press conference on 17 February 2025 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 26 February 2025 at 3:00 p.m. The next monetary policy meeting of the NBR Board will be held on 7 April 2025.