The National Bank of Romania explains the “prudent” step of reducing the key interest rate
The National Bank of Romania explains the “prudent” step of reducing the key interest rate through the high risks present in the economy, especially those coming from the fiscal-budgetary area. The increase in salaries in the public sector and the minimum wage is expected to put pressure on private sector salaries as well, leading to an increase in consumer demand, especially as the economy is expected to accelerate anyway. However, the BNR sees inflation decreasing more sharply than anticipated in the spring.
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“In the unanimous appreciation of the members of the Council, the recent and near-future decrease in the annual inflation rate on a trajectory significantly lower than previously anticipated, as well as the still high uncertainties associated with developments in the longer term horizon, justify a reduction.”
The Central Bank’s Decision on Interest Rates
The latest monetary policy meeting minutes from the National Bank of Romania emphasize the caution in adjusting interest rates. The central bank has decided to reduce interest rates by 0.25 percentage points, with the key rate at 6.75% and the deposit facility rate at 5.75%, marking the first such adjustment in three years.
Inflation Outlook
Inflation has been on a downward trend, dropping from 6.6% in March to 5.1% in May and further to 4.9% in June, below the BNR’s previous forecast. The central bank now anticipates even lower inflation in the coming months, driven by supply-side factors and recent legislative changes in the energy sector approved in April, although the impact of these changes remains uncertain.
Procession with Relics in Teleorman to Bring Rain
In an effort to bring rain to the drought-stricken region of Teleorman, a procession with relics is being organized. The recent decrease in inflation has been attributed to the significant drop in energy prices, especially gas, and the stabilization of food prices. However, the National Bank of Romania (BNR) notes that prices in other categories, especially services, remain high.
Budget Deficit and Corrective Measures
BNR once again warns of the risks posed by the fiscal situation, as the budget deficit has increased to 3.6% of GDP halfway through the year. “Council members have highlighted the uncertainties and increased risks arising from the conduct of fiscal and revenue policies in 2024, against the backdrop of budget execution in the first five months of the year, as well as the dynamics of public sector salaries and the full impact of the new pension law. However, they also discussed the significant risks associated with the conduct of these policies over a longer time horizon.”
The Impact of Salary Increases on the Private Sector
The increase in salaries for public sector employees, along with the rise in the minimum wage, will put additional pressure on salary increases in the private sector, according to the National Bank of Romania. This comes at a time when the labor market has become even more strained – the number of employees in the economy has increased, even though unemployment has slightly risen and companies are struggling to find qualified labor.
The Impact of Rising Wages on Inflation and Competitiveness
Salaries continue to increase at double-digit rates in the communist state of Slovakia, leading to high labor costs in the industry. This dynamic could fuel inflation in the future, exacerbated by the state’s income policy, according to the National Bank of Slovakia.
“The developments have been considered concerning by the members of the Council from the perspective of potential effects on future inflation, as well as on external competitiveness,” the statement reads.
“At the same time, it was agreed that persistent gaps between the demand and supply of labor in certain market segments, especially the dynamics of salaries in the public sector and the increase in the minimum wage from July, are likely to generate additional pressures on wages and labor costs in the private sector in the near future.”
Anticipating Economic Growth to Accelerate
The Bank foresees pressures on wages and labor costs continuing to rise due to the current wage trends. Economic growth is expected to pick up pace, but concerns remain about the impact on inflation and competitiveness in the long term.
Increasing inflation risks in the near future
Economic growth, which was weak in the first quarter (+0.4% quarterly, 0.1% annually) is expected to accelerate in the next two quarters, driven by faster consumption and investment, especially in construction.
Economic Outlook
Discussions on the cyclical position of the economy indicate significant quarterly growth in the second and third quarters of 2024, stronger than previously forecasted. This implies a progressive recovery of the annual GDP dynamics in this period, following a significant decline in the first quarter.
The Leu at risk
Twin deficits – fiscal and current account – could pose problems for the exchange rate.
The Risks of Exchange Rate Behavior
Members of the Council have raised concerns about the risks associated with the behavior of the exchange rate of the national currency. They have mentioned the twin deficits and uncertainties related to the fiscal consolidation process, as well as the current geopolitical tensions. In the near future, the relative attractiveness of investments in the national currency and the impact of seasonal factors could be more influential, according to the National Bank of Romania.
The next monetary policy meeting of the National Bank of Romania is scheduled to take place in August.