RO: NBR key rate unchanged at 6.50%

NBR decided to keep monetary policy rate unchanged at 6.50% at the last meeting of the current Board. This decision is in line with the market consensus but came contrary to our expectation of a 25bp cut. Considering that there is only one last meeting left this year on 8 November at which time the NBR will also release a new inflation projection, which will most likely be revised higher, we now expect the key rate to end 2024 at 6.50%. The fiscal slippage and heavy election period in the last two months of the year will most likely add an extra degree of prudence for the NBR decision making. We now expect the next rate cut to take place only in 2Q25.

High uncertainties and risks seen by the NBR come mainly from the fiscal side. The budget execution in the first eight months show a deficit of 4,57% of GDP. Local media sources are saying that it reached 5.45% in September. The government revised the budget deficit target for this year higher at 6.9% from 5.0% previously, but our view is that it will be around 7.9%. Fiscal problems are also reflected in the current account balance. The trade balance is affected by the boom in household consumption and the sluggish external demand. This is also a point of concern of the NBR. We expect a current account deficit of 8.1% of GDP this year. Retail consumer lending acceleration is also worrying in NBRs view in the context of inflationary pressure coming from excess demand.

In the press release the NBR highlights the slower than expected economic growth in 2Q24 which indicates that excess aggregate demand is likely to have narrowed. The current assessment of the NBR regarding expected inflation developments shows further deceleration expected until the end of 2024 but on a fluctuating and higher path than that shown in August. Our latest figures are in line with this assessment.

Press release sentiment: overall hawkish