RO: Cautiously dovish, data dependent NBR
We perceived the NBR governor cautiously dovish at the quarterly Inflation Report press conference, signaling further rate cuts if the inflation performs in line with the central bank forecast, in absence of an event which might trigger capital outflows, as he reiterated that the exchange rate remains a policy anchor. The governor considers the current monetary policy stance relatively firm and by cutting the rate the central bank removed some of the policy restrictiveness. The NBR remains data-depended, keeping some policy restrictiveness to offset expansionary fiscal policy. As inflation is expected to decelerate further, the real policy rate increases, tightening the monetary policy stance.
Provided that the external environment remains benign and domestic political scene does not boil over ahead of presidential and general elections, we continue to expect 25bp rate cut at each of the remaining meetings for the current year, scheduled on 4 October and 8 November. Even in this scenario, based on the NBR assessment of the current policy stance as firm, with inflation falling to 4.0% by year-end, the policy restrictiveness would increase. Presidential elections are scheduled for 24 November with the run-off on 8 December, while general election date is set for 1 December.
The NBR lowered end-2024 inflation forecast to 4.0% y/y, matching our projection, from 4.9% y/y. End-2025 CPI outlook was revised down by 0.1pp to 3.4% y/y vs 3.7% y/y our forecast. Core inflation is seen by the NBR above headline for the entire forecast horizon, in line with our view.
We see risks to the inflation outlook coming from both directions. Energy prices remained volatile in recent months following legislative changes implemented as of April and might remain so in the near future adding a high degree of uncertainty. Brent oil prices curve has shifted downwards in July vs June but given the still ongoing conflicts in Ukraine and Middle East an upward shift later this year is not out of the equation. Political factors should also play an important role for inflation trajectory in 2025 as the government needs to bring additional revenues in order to address the large fiscal deficit.
Other key messages from NBR governor Isrescu press conference: i) inflation expectations have been trending downwards lately which is a positive sign for the inflation fight; ii) core inflation is seen as the main disinflation driver over the forecast horizon; iii) exchange rate stability remains a policy anchor and it should be preserved, while the central bank has enough FX reserves and the option to increase the cost of carry to the key rate level via liquidity sterilization auctions; iv) he highlighted the fact that monetary policy remains restrictive even after two consecutive cuts, as rates remain positive in real terms; v) we should expect a longer period with positive real rates; vi) the NBR has the back-up option to sterilize the surplus liquidity in the money market at the key rate level via open market operations if the disinflation process reverses; vii) consumer lending growth acceleration in recent months is a factor of concern in the inflation fight; viii) NBR governor expects July CPI - which will be released next week - above 5% y/y.
Markets are currently pricing in three more cuts by the ECB this year and more than 100bp of easing from US Fed by year-end. Hence, the monetary policy outlook priced for core markets should support further NBR rate cuts this year.