NBR Board decisions on monetary policy

In its meeting of 7 August 2024, the Board of the National Bank of Romania decided the following:   to cut the monetary policy rate to 6.50 percent per annum, from 6.75 percent per annum starting 8 August 2024; to lower the lending (Lombard) facility rate to 7.50 percent per annum from 7.75 percent per annum and the deposit facility rate to 5.50 percent per annum from 5.75 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 continued to decline in June 2024, down to 4.94 percent, below the forecast, from 5.12 percent in May, as a result of the decreases in core inflation and fuel price dynamics, which were partly counterbalanced, in terms of impact, by the increase in natural gas prices.   Compared to March, the annual inflation rate went down in June by more than expected, i.e. by 1.67 percentage points (from 6.61 percent), mainly due to the notable drop in energy prices, especially natural gas prices, in 2024 Q2 overall, following the legislative changes implemented as of April, as well as amid the further deceleration in the growth rate of food prices.   At the same time, the annual adjusted CORE2 inflation rate fell at a faster pace in Q2, also compared with the forecasts, down to 5.7 percent in June, from 7.1 percent in March 2024. Behind the deceleration stood, during this period as well, disinflationary base effects and downward corrections of commodity prices. Additional influences stemmed from the decreasing dynamics of import prices and the short-term inflation expectations resuming a slight downward trend. A moderate opposite impact had the hikes in unit labour costs recorded in the first months of 2024, which were passed through, at least in part, into some consumer prices, inter alia amid a robust demand for goods.   The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 5.3 percent in June from 6.7 percent in March 2024. The average annual CPI inflation rate fell to 7.2 percent in June from 8.5 percent in March 2024. In turn, the average annual HICP inflation rate decreased to 7.3 percent in June 2024 from 8.3 percent in March 2024. Economic activity expanded by 0.7 percent in 2024 Q1, to a lower extent than anticipated, which makes it likely for excess aggregate demand to have further narrowed over this period, contrary to expectations. Moreover, annual GDP growth contracted markedly in 2024 Q1 to 0.5 percent from 3.0 percent in the previous three months. The decline was driven this time round mainly by gross fixed capital formation, whose annual dynamics plummeted from the very high two-digit level seen in 2023 Q4, whereas household consumption continued to witness a faster annual rise.   Net exports exerted a larger contractionary influence in 2024 Q1, against the backdrop of a slight pick-up in the differential between the positive dynamics of the import volume of goods and services and the negative change in the export volume.   The annual growth rate of the trade deficit picked up only marginally, while that of the current account decreased considerably from the previous quarter, given, inter alia, the strongly faster annual increase in the secondary income surplus, mainly on account of inflows of EU funds to the current account.   The latest data and analyses point to a somewhat more robust quarter-on-quarter economic growth in 2024 Q2 than previously anticipated, implying a marked step-up in the annual GDP dynamics.   Thus, in April-May, the annual growth rate of retail sales and that of motor vehicles and motorcycles sales picked up as compared to Q1, the manufacturing output saw a slight rebound, and the dynamics of the volume of construction works climbed markedly into positive territory, after falling to a significant negative value in the first three months of 2024 overall. However, the annual change in the imports of goods and services further posted a larger positive differential with that in exports, seeing a relatively stronger increase. Consequently, the trade deficit and the current account deficit recorded a significantly faster deepening in April-May as compared to the same year-ago period.   Looking at the labour market, in May 2024 the number of employees economy-wide recorded a strong contraction, after the substantial rise in April, while the ILO unemployment rate picked up gradually in April-June to 5.5 percent, standing below the 5.6 percent average seen in 2023 H2. At the same time, the surveys indicated in July more moderate employment intentions over the very short horizon than in Q2, as well as a declining labour shortage, in contrast to the rising shortage reported by companies in the first two quarters of 2024. The two-digit annual growth rate of the nominal gross wage and particularly that of unit labour costs in industry went down in April-May overall, remaining however high.   The main interbank money market rates declined in the first ten days of July, as a result of NBR cutting the key interest rate and the interest rates on its standing facilities, and afterwards remained steady. At the beginning of the month long-term yields on government securities re-embarked and subsequently stayed on a generally downward path – relatively in line with developments in advanced economies and in the region. This occurred amid investors’ revised expectations on the Fed’s interest rate path, with an impact on global risk appetite as well. Against this background, the EUR/RON exchange rate witnessed a downward correction in the first part of July and then remained relatively stable. Towards the end of the month it climbed to the higher values prevailing in Q2 amid the increased international financial market volatility inter alia following the escalation of tensions in the Middle East.   The annual growth rate of credit to the private sector picked up to 6.7 percent in June from 5.7 percent in May, as the domestic currency component continued to accelerate its rate of increase, primarily on account of developments in credit to non-financial corporations, while the dynamics of foreign currency credit remained on a mildly upward, albeit fluctuating, path. Against this backdrop, the share of leu-denominated loans in credit to the private sector widened to 69.1 percent in June from 68.8 percent in May.   In today’s meeting, the NBR Board examined and approved the August 2024 Inflation Report, which incorporates the latest available data and information. The updated forecast sees the annual inflation rate going down further on a lower path than that shown in the previous projection, especially in the near run.   Specifically, the annual inflation rate is envisaged to decline, at end-2024 and in 2025 Q1, to significantly lower values than previously anticipated, while after a temporary pick-up in 2025 Q2, it is expected to return and remain until the end of the projection horizon slightly below the upper bound of the variation band of the target, and implicitly at somewhat lower than previously forecasted levels.   The drop in the annual inflation rate will be further driven by supply-side factors, whose disinflationary action will continue to be stronger over the short term than anticipated earlier, due to the impact exerted by base effects and the legislative changes in the energy sector. To this will add the influences expected to come throughout the forecast horizon from the decrease in short-term inflation expectations and the deceleration in import price growth, as well as from the very mild contraction of excess aggregate demand, relatively in line with the previous forecasts.   Heightened uncertainties and risks stem from the fiscal and income policy stance, given on one hand the budget execution in the first six months of the year, the public sector wage dynamics and the full impact of the new law on pensions, and on the other hand the fiscal and budgetary measures that could be implemented in the future to carry on budget consolidation, in the context of the medium-term fiscal-structural plan expected to 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 sizeable uncertainties and risks. At the same time, significant uncertainties are associated with developments in energy and food prices amid the legislative changes and the protracted drought this year, as well as with the future evolution of crude oil prices amid geopolitical tensions. Uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, also continue to arise from the war in Ukraine and the Middle East conflict, as well as from the economic performance in Europe. 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 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.   In view of the significant improvement in the near-term inflation outlook versus the previous projection, but also amid the still elevated uncertainty surrounding forecasts over the longer time horizon, the NBR Board decided to cut the monetary policy rate to 6.50 percent per annum from 6.75 percent per annum, starting 8 August 2024. Moreover, it decided to lower the lending (Lombard) facility rate to 7.50 percent per annum from 7.75 percent per annum and the deposit facility rate to 5.50 percent per annum from 5.75 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 new quarterly Inflation Report will be presented to the public in a press conference on 9 August 2024 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 August 2024 at 3:00 p.m. The next monetary policy meeting of the NBR Board will be held on 4 October 2024.