RO: NBR preview: We look for another rate cut, against consensus

NBR rate decision on 4 October is likely to be another close call. The Bloomberg median survey is for no change with 11 out of 19 respondents seeing rates flat, while the rest are expecting a 25bp key rate cut to 6.25%. We are in the rate cut camp, though we see material probability (~30%) for a no change. This is the last rate setting meeting of the current NBR Board which has the mandate expiry on 10 October and five out of nine Board members have been reconfirmed for a new term by the Parliament.

We perceived the NBR governor as cautiously dovish at the latest press conference, signalling further rate cuts if inflation performs in line with the central bank forecast, in the absence of an event which might trigger capital outflows, as he reiterated that the exchange rate remains a policy anchor. The governor considered the monetary policy stance relatively firm and, by cutting the key rate twice, the central bank removed some of the policy restrictiveness. The NBR remains data-dependent, keeping some policy restrictiveness to offset the expansionary fiscal policy. As inflation is expected to decelerate further, the real policy rate increases, tightening monetary policy stance.

Provided that the external environment remains benign, and the domestic political scene does not boil over ahead of presidential and general elections, we expect a 25bp rate cut at each of the remaining meetings for the current year, scheduled for October 4 and November 8. Even in this scenario, based on the NBR assessment of the current policy stance as firm, with inflation expected to fall towards 4.0% by year-end, the policy restrictiveness should increase. However, we see risks that the NBR could revise marginally higher its short-term inflation forecast at the November Inflation Report.

The NBR decision making factors-in interest rate expectations for core and regional markets. The markets are currently fully pricing-in 50bp of rate cuts from both ECB and US Fed by year-end. CEE central banks expected to continue to reduce rates into the next year, while NBR might be forced to pause due to fiscal consolidation which could be inflationary in the short run and push inflation expectation higher. That could increase the interest rate differential and attract unwanted capital inflows. The NBR governor hinted in the latest press conference that the central bank is monitoring the interest rate differential.

Inflation expectations have been on the downtrend lately, a fact highlighted by NBR governor as well, while core inflation is expected to be the main disinflation driver in the latest central bank inflation outlook. Wage growth has been driven recently mainly by hikes in public sector and minimum wages rather than inflation expectations. On the other hand, services inflation remains quite elevated, though the gap between wage-sensitive services inflation and headline services component ex-regulated prices tightened since it reached the peak in October last year. At the same time, both headline and core inflation surprised to the upside recently and are likely to come above the NBR projection for the end of the third quarter. Hence, a close call by the central bank. If it decides to keep rates on hold in October, this will signal a change in policy outlook by the NBR, in our view. This would make us expect a longer pause, as the NBR might find even more difficult to motivate a rate cut at November meeting when the inflation outlook is likely to be revised a bit higher.

Market implications: positive for ROMGBs.