Romania’s central bank makes new monetary policy rate cut amid economic adjustments

On August 7, 2024, the Board of the National Bank of Romania (NBR) decided to cut the monetary policy rate from 6.75% to 6.50%, effective from August 8, 2024. This decision also included lowering the lending (Lombard) facility rate to 7.50% from 7.75% and the deposit facility rate to 5.50% from 5.75%. The minimum reserve requirement ratios on both RON- and foreign currency-denominated liabilities of credit institutions remain unchanged.

The NBR decision was primarily motivated by the continuing decline in the annual inflation rate, which fell to 4.94% in June 2024 from 5.12% in May. This reduction was driven by decreases in core inflation and fuel prices, though somewhat offset by rising natural gas prices. The inflation rate had also seen a notable drop from 6.61% in March 2024, largely due to falling energy prices and decelerating food price growth.

The annual adjusted CORE2 inflation rate also declined faster than expected, dropping to 5.7% in June from 7.1% in March 2024. This reduction was attributed to disinflationary base effects, downward corrections of commodity prices, decreasing import prices, and short-term inflation expectations. However, unit labor costs increased in early 2024, contributing to some consumer price rises amid strong demand for goods.

Economic activity in Romania showed mixed signals. GDP growth in Q1 2024 was modest at 0.7% compared to Q4 2023 and 0.5% compared to Q1 2023, with a significant contraction in gross fixed capital formation. Yet, economic indicators suggested a more robust growth in Q2 2024, with increases in retail sales, motor vehicle sales, and construction output.

The labor market experienced fluctuations, with a sharp contraction in employee numbers in May 2024 following a substantial rise in April. The unemployment rate gradually increased to 5.5% by June, slightly below the 2023 H2 average of 5.6%.

The NBR's rate cut aims to maintain price stability and support sustainable economic growth. The decision reflects improved near-term inflation prospects but acknowledges ongoing uncertainties from fiscal policies, wage dynamics, energy prices, geopolitical tensions, and economic conditions in Europe.

The NBR remains vigilant and ready to adjust its policies to ensure medium-term price stability and financial stability. The next monetary policy meeting is scheduled for October 4, 2024.

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