The board of the National Bank of Romania (BNR) decided to keep the monetary policy rate (chart) at 6.50% at its meeting on October 4, “in light of the elevated uncertainty”. 

The BNR cut the policy rate for the first time in July (-25bp), after it kept it at 7% since January 2023 to fight inflation that is expected at just over 4% y/y by the end of this year.

Analysts’ expectations were mixed ahead of the October rate-setting decision, although slightly skewed towards a 25 basis points (bp) cut.

The BNR outlined both internal and external uncertainties. 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 recent budget revision, and on the other hand the fiscal and budgetary measures that could be implemented in the future.

Heightened uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, also 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, the BNR said.

The BNR board reiterated 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.

CORE2 inflation accelerated in August and the BNR expects disinflation to follow a path above that sketched in August. The annual adjusted CORE2 inflation rate saw a halt in its downward trend, climbing to 5.8% in August from 5.7% in June, an effect “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”.  

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 BNR expects economic growth to pick up in Q3, but remain below previous projections. 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, the BNR commented.

Lending is gaining momentum in Romania, although driven by the retail segment, the BNR said. The central bank also noted the annual growth rate of credit to the private sector that picked up further in the first two months of Q3, to 7.7% in August from 6.7% in June, mainly due to the faster rise in domestic currency loans to households, primarily driven by consumer credit.

The status quo decision of Romania’s BNR came against mixed expectations.

The median Bloomberg poll issued before the BNR board meeting, cited by BCR chief economist Ciprian Dascălu, predicted no change with 11 out of 19 respondents seeing rates stable, while the rest expected a 25bp cut. 

Dascalu said he also expects another 25bp rate cut at the last board meeting this year on November 8, “provided the external environment remains benign and the domestic political scene does not deteriorate ahead of the presidential and general elections”.

However, Valentin Tătaru, chief economist of ING Bank, believes that the key interest rate will remain at 6.50% until the end of the year. Lending has gained momentum and the fiscal stimulus remains robust, he said.