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National Bank of Romania Lowers Key Interest Rate Again
The National Bank of Romania (NBR) has announced a decrease of 0.25 percentage points in the key interest rate for the second consecutive monetary policy meeting, marking the final session of the summer. This decision comes as a surprise to analysts who anticipated that the central bank would maintain its current rate amid economic uncertainties and risks. The NBR highlighted significant concerns regarding fiscal policy but also noted that the declining inflation rates justify the reduction in interest rates.
The key interest rate has now been set at 6.5% per annum, while the deposit facility and credit facility rates have been adjusted to 5.5% and 7.5%, respectively.
Analysts’ Expectations and Inflation Trends
Financial analysts surveyed by Bloomberg were not expecting any changes from the central bank, especially after the NBR implemented its first key rate cut in three and a half years, just a month prior. This cut was prompted by inflationary pressures stemming from rising wages and increased consumption, alongside concerns related to a significant budget deficit that exceeds the established target.
The NBR pointed out that inflation has dropped unexpectedly in recent months, with the annual rate decreasing to 4.9% in June from 6.6% in March. This decline has primarily been due to lower energy prices and a slower increase in food prices.
Future Projections for Inflation
The central bank anticipates that inflation will follow a downward trajectory that is lower than previously projected in May. By the end of this year and in the first quarter of 2025, inflation is expected to reach levels significantly below earlier forecasts. A temporary rise in inflation is predicted for the second quarter of 2025, followed by a return to the target range of 1.5-3.5%. The NBR is set to release its updated inflation forecast on August 10.
The anticipated reduction in inflation is expected to stem from supply-side factors, which include baseline statistical effects and legislative changes in the energy sector. Additionally, there are expectations of declining inflation forecasts, slower price increases for imports, and a slight easing of excess demand in the economy, according to the central bank.
Concerns Amid Economic Uncertainty
This “significant improvement in the near-term inflation outlook” has been cited by the NBR as a reason for lowering the monetary policy rate. However, the bank also acknowledges the many risks and uncertainties present in the economy, with fiscal policy being the most prominent concern. The labor market is also under scrutiny, as there has been a consistent trend of double-digit salary increases for over a year.
“Significant uncertainties and risks stem from the conduct of fiscal policy and its implications,” the NBR stated.
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Economic Overview and Future Projections
The current economic landscape reveals a complex interplay of factors influencing revenue generation, particularly when considering the budgetary execution during the first half of the year, the trends in public sector salaries, and the comprehensive effects of the newly introduced pension legislation. Additionally, potential fiscal measures aimed at further budget consolidation are being evaluated, especially in light of the medium-term fiscal-structural plan expected to be submitted to the European Commission this autumn.
According to the National Bank, significant uncertainties and risks are associated with the labor market conditions and salary dynamics within the economy. Notably, there has been a marked decline in the number of employees reported in May, coupled with an inflation increase to 5.5% observed during the April to June period. Companies have also indicated a reduced workforce deficit, further complicating the employment landscape.
Inflation and Market Dynamics
Additional substantial uncertainties regarding inflation forecasts stem from fluctuations in energy and food prices. These changes are influenced by legislative adjustments and the prolonged drought experienced this year, along with volatility in oil prices amid ongoing geopolitical tensions. The National Bank anticipates a quarterly and annual acceleration in economic growth during the second quarter, surpassing previous forecasts.
There are signs of a revival in trade and a slight recovery in the industrial sector, along with an increase in construction activity. In the monetary market, the National Bank has observed a decrease in interest rates following the July decision to lower the key rate. Furthermore, in the banking sector, there has been an acceleration in private credit growth, rising to 6.7% annually, up from 5.7% in May.
Deposit Rates and Financial Trends
As previously reported, deposit interest rates, calculated retrospectively, have turned positive in the last two months (May and June) for which data is available—a phenomenon not witnessed in the past seven years. This shift could indicate a change in the financial landscape, providing new opportunities for savers and influencing overall economic stability.
