The National Bank of Romania Board members present at the meeting: Mugur Isărescu, Chairman of the Board and Governor of the National Bank of Romania; Leonardo Badea, Vice Chairman of the Board and First Deputy Governor of the National Bank of Romania; Florin Georgescu, Board member and Deputy Governor of the National Bank of Romania; Cosmin Marinescu, Board member and Deputy Governor of the National Bank of Romania; Aura-Gabriela Socol, Board member; Roberta-Alma Anastase, Board member; Csaba Bálint, Board member; Cristian Popa, Board member.
During the meeting, the Board discussed and adopted the monetary policy decisions, based on the data on and analyses of recent macroeconomic developments and the medium-term outlook submitted by the specialised departments, as well as on other available domestic and external information.
Looking at the developments in inflation, Board members showed that the 12-month inflation rate had risen to 5.14 percent in October-December 2024, thus shedding 1.47 percentage points for 2024 as a whole, after a 9.76 percentage point decline in 2023. It was noted that the annual adjusted CORE2 inflation rate had seen a relatively more pronounced drop in 2024 – by 2.8 percentage points compared to 6.3 percentage points in 2023 –, falling to 5.6 percent in December, mainly on account of the non-food sub-group, the annual dynamics of which had remained however elevated, the same as the growth rate of market services prices.
In that context, Board members reiterated that the annual inflation rate had increased above expectations in 2024 Q4 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. At the same time, Board members pointed out the flat trajectory of the annual adjusted CORE2 inflation rate in 2024 Q4, which had halted its downward trend, remaining at the level posted in September until year-end, as the further acceleration of the growth in processed food prices had been accompanied over that period by the markedly slower disinflation in the non-food segment and by the steady pace of disinflation in services prices.
The behaviour of core inflation in 2024 Q4 reflected the relatively equal opposite influences coming over that period, on the one hand, from the 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 their assessment, Board members emphasised the step-up in 2024 Q4 in the dynamics of industrial producer prices for consumer goods after a continuous seven-quarter decrease, and, particularly, the high and rising short-term inflation expectations of firms and consumers over the same period, as well as their surge in early 2025. At the same time, it was noted that the financial analysts’ longer-term inflation expectations had remained unchanged in January 2025 too, marginally below the upper bound of the variation band of the target, where they had dropped in mid-2024, whereas the household real disposable income had continued to increase faster October through November 2024 to a two-digit level, reflecting the larger social transfers and the high dynamics of net real wage, albeit on a mild decrease.
Furthermore, Board members referred to the very recent data on the evolution of the consumer price index, which showed that the annual inflation rate had fallen to 4.95 percent in January 2025, primarily under the impact of substantial base effects visible in the adjusted CORE2 inflation, whose annual rate had dropped to 5.1 percent.
As for the cyclical position of the economy, Board members underlined that economic activity had stalled in 2024 Q3, which, in the given context, implied that excess aggregate demand had narrowed relatively in line with forecasts.
However, the annual rate of increase of household consumption had remained fast-paced in 2024 Q3, albeit it had slowed down somewhat compared to Q2, Board members pointed out on several occasions. At the same time, it was shown that exports had exerted a considerably lower contractionary impact, the annual GDP growth rate stepping up to 1.2 percent in 2024 Q3 from 0.9 percent in Q2, although the annual dynamics of gross fixed capital formation had continued to see a steep decline, falling to a nine-quarter low.
Moreover, it was observed that the preliminary data pointed to a stronger quarterly growth of the economy in 2024 Q4 than that envisaged in November 2024 and to its sharp acceleration to 0.8 percent from 0.1 percent – marginally revised for the previous quarter, but also to a decline in the annual GDP dynamics over that period to 0.7 percent.
Nevertheless, available high-frequency indicators suggested a robust advance in private consumption in the final quarter of 2024, in the context of the strong dynamics of household income, Board members remarked. Gross fixed capital formation could, however, have made a negative contribution to the annual GDP dynamics, mainly on account of construction, whereas net exports had probably continued to see a lower contractionary impact, as the annual change in the exports of goods and services had further narrowed, in 2024 Q4, its unfavourable differential with that in imports, which had contracted somewhat more visibly. Consequently, the trade deficit had continued to see a slower annual increase over that period, whereas the current account deficit had recorded a considerably swifter widening amid the sharp deterioration of income balances, Board members pointed out.
Looking at the labour market, Board members agreed that the latest data and surveys strengthened the previous assessments on a probably temporary halt in the easing of market conditions in 2024 Q4, in line with the relative step-up in the economic activity. The faster pick-up in the number of employees economy-wide in October-November and the decline in the ILO unemployment rate in the last three months of 2024 to 5.2 percent in December, after its rise to an average of 5.6 percent in Q3, were deemed to be relevant. Furthermore, employment intentions over the very short horizon had slowed their decline in 2024 Q4 and had seen a significant recovery in January 2025, while the labour shortage reported by companies had widened in early 2025, 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 had declined in 2024 Q4, after having, however, risen to 16.7 percent and 18.6 percent respectively in the previous quarter, and had thus remained high and a reason for concern from the perspective of inflation, but also of external competitiveness, Board members concluded, also pointing out the new hike in the gross minimum wage economy-wide in January 2025.
At the same time, it was assessed that the recent increase in labour demand and the removal of some tax breaks at the onset of 2025 could fuel pressures on wages and labour costs in the private sector, at least in the near run, also in the context of structural labour market deficiencies, as well as amid the recent and anticipated developments in inflation and household consumption. However, opposite effects were expected from wage and employment policy measures implemented in the public sector in 2025 for budget consolidation purposes, as well as from external demand and the uncertainties surrounding its outlook in the current global economic and trade environment, alongside the higher resort by employers to workers from outside the EU, but also to technology integration, several Board members deemed.
Turning to financial conditions, Board members remarked that the main interbank money market rates had witnessed mild increases in the second 10-day period of January 2025 and then had stabilised at the new levels. At the same time, they noted the wide fluctuations of the long-term yields on government securities, which had extended their steep upward course in the first part of January, before posting a sharp downward correction towards the end of the month, due to an improvement in global risk appetite, but also to a decline in financial investor concerns about fiscal consolidation prospects after the authorities had announced the draft budget coordinates for 2025. Against that background, the EUR/RON exchange rate had tended to remain in the first month of the year at the higher values it had returned to in mid-Q3 of 2024. In relation to the US dollar, the leu had continued to weaken relatively swiftly until mid-January, but had then recovered the ground lost, as a result of the former’s performance in international financial markets.
Risks to the behaviour of the leu’s exchange rate remained high, Board members deemed repeatedly, citing the wide twin deficits and the domestic political situation, likely to trigger fiscal consolidation-related concerns in the near future. Moreover, reference was made to the geopolitical tensions and the trade policy measures of the US administration, with potential implications for the Fed’s/major central banks’ monetary policy decisions and for the volatility in the international financial market.
At the same time, it was observed that the annual growth rate of credit to households had continued to rise rather sharply in December 2024, chiefly as a result of a further acceleration in leu-denominated consumer credit growth, but also with a new significant contribution from domestic currency housing loans, the monthly flow of which had hit a fresh record high. However, the pace of increase of loans to non-financial corporations had seen a standstill, so that the annual growth rate of credit to the private sector had stepped up only marginally to 8.9 percent in the final month of last year. Moreover, the share of the domestic currency component in credit to the private sector had halted its upward trend, narrowing to 70.1 percent in December 2024 from 70.2 percent a month earlier.
As for the future macroeconomic developments, Board members showed that the latest assessments indicated a new worsening of the short-term inflation outlook compared to the previous forecasts. Specifically, the annual inflation rate was expected to see a marked fluctuation in 2025 H1, 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, primarily amid base effects, the annual inflation rate would probably halt its decline, remaining virtually constant until the end of the forecast horizon, at levels only marginally lower than previously projected. Thus, the annual inflation rate was seen going down to 3.8 percent in December 2025 and to 3.1 percent in December 2026, at the end of the forecast horizon, compared to 3.5 percent and 3.3 percent respectively, as indicated by the prior projection for the same reference periods, Board members pointed out.
It was agreed that the generally downward trend of the annual inflation rate in the following five quarters, but also its subsequent halt, were largely attributable to supply-side factors. The latter would have a further disinflationary action in the short run, mainly under the impact of base effects manifest in the non-food sub-components of core inflation, as well as in the growth rates of tobacco product, fuel and VFE prices. The overall disinflationary action of supply-side factors would, however, be weaker than previously anticipated and would temporarily fade in 2025 Q2 given the opposite influences stemming over the short horizon from unfavourable base effects – associated inter alia with legislative changes in the energy field implemented in April 2024 –, as well as from the persistent effects exerted on food and energy price dynamics by the severe drought in 2024, by the increase in some commodity prices, and by the higher energy consumption over the winter months, Board members noted.
At the same time, the balance of risks from supply-side factors remained tilted to the upside, Board members deemed. They highlighted the uncertainties associated with the forecasts on food and energy prices given the applicable legislation and the price movements in wholesale markets, as well as with the future path of crude oil prices. Moreover, notable risks came from the expansion trend of trade protectionism, potentially impacting other commodity prices and the prices of some intermediate and final goods, Board members pointed out on several occasions.
It was concluded that underlying price pressures would gradually turn from modestly inflationary currently to mildly disinflationary, given the lagged disinflationary effects from the negative output gap anticipated to open and to widen moderately during the current year, as well as amid the markedly faster growth of household consumption in 2024 and the double-digit dynamics of wage costs in the private sector, probably also in the near future.
Core inflation would continue, nevertheless, to reflect over the short term the influences of disinflationary base effects in the non-food and services segments, which would outweigh the opposite influences anticipated to stem from the processed food price dynamics, under the impact of unfavourable statistical effects and of the rise in some agri-food commodity prices, Board members remarked.
It was also observed that hefty disinflationary effects strengthening over the entire forecast horizon were expected from the downward adjustment of short-term inflation expectations – at a slightly slower pace, however, than in the prior projection and from a somewhat higher level than previously anticipated –, to which would add influences in the same direction, yet much more modest, from the deceleration in import price growth.
Under the circumstances, the annual adjusted CORE2 inflation rate would probably decline steadily over the forecast horizon, but relatively slowly and on a higher path in the short run than that in the previous projections. Specifically, it was seen falling to 3.7 percent in the closing month of 2025 and 2.9 percent in December 2026, at the end of the projection horizon, compared to 3.5 percent and 3.2 percent respectively, as previously forecasted for the same reference periods.
As for the future cyclical position of the economy, Board members showed that, according to the new data and assessments, economic growth had seen a stronger-than-expected slowdown in 2024 and would probably witness during 2025-2026 a less visible recovery than previously anticipated, yet at a gradually faster pace, reflecting the moderation in inflation, the revival of external demand and the larger use of European funds under the Next Generation EU instrument. The developments rendered likely a reversal of the cyclical position of the economy in H1 and a mild increase in the aggregate demand deficit until end-2025, but also its gradual shrinking over the course of 2026, Board members remarked.
It was observed that private consumption would remain the main driver of GDP advance over the forecast horizon, yet with a much smaller contribution than in 2024, especially during the current year, amid the package of fiscal and budgetary measures implemented recently for budget consolidation purposes, conducive to a stronger impact on household income dynamics, after their sizeable step-up in the previous period.
Conversely, gross fixed capital formation would accelerate its growth, which had slowed markedly in 2024, so that its contribution to the GDP advance would rise progressively over the forecast horizon, reflecting the absorption and use of a large volume of EU funds, conducive to fostering public investment with stimulative effects on the private sector. However, that would occur in the context of uncertainties associated with the fiscal adjustment programme, as well as the economic developments in Europe, inter alia amid geopolitical tensions and the broadening of protectionist measures globally, Board members agreed.
At the same time, it was noted that the contractionary impact of net exports would diminish considerably in the current year, in correlation with the marked narrowing of the differential between the anticipated rate of change of domestic absorption and that of external demand. Against that background, after having risen significantly as a share in GDP in 2024, the current account deficit would probably witness a visible correction during 2025-2026, contrary to previous forecasts, yet would stay considerably above European standards over the projection horizon. Thus, it would further represent a major vulnerability, via the risks to inflation, the sovereign risk premium and, ultimately, to economic growth sustainability, Board members underlined.
Uncertainties and risks continued to stem from the future fiscal policy stance, Board members showed. They referred to the corrective fiscal and budgetary measures adopted so far and to the budget programme approved for 2025 – both decisive for the budget deficit to re-embark on a downward path –, but also to the budget consolidation requirement according to the National Medium-Term Fiscal-Structural Plan agreed with the European Commission and under the excessive deficit procedure.
Board members also pointed out the heightened uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, arising 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 geopolitical tensions and the trade policy measures of the US administration.
Considering the overall context, Board members insisted on the importance of absorbing and efficiently using EU funds, especially those under the Next Generation EU programme, which were essential for carrying out the necessary structural reforms and energy transition, but also for counterbalancing, at least in part, the contractionary impact exerted by geopolitical conflicts and by budget consolidation, as well as for enhancing the growth potential and strengthening the resilience of the Romanian economy.
Board members were of the unanimous opinion that the analysed context overall warranted a policy rate status-quo, with a view to ensuring and maintaining price stability over the medium term, in a manner conducive to achieving sustainable economic growth.
In addition, Board members reiterated the importance of further closely monitoring domestic and global developments so as to enable the NBR to tailor its available instruments in order to achieve the fundamental objective regarding medium-term price stability, while safeguarding financial stability.
Under the circumstances, the NBR Board unanimously decided to keep the monetary policy rate at 6.50 percent. Moreover, it decided to leave unchanged the lending (Lombard) facility rate at 7.50 percent and the deposit facility rate at 5.50 percent. Furthermore, the NBR Board unanimously decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.