RO: NBR on hold, as expected

The NBR decided to keep the monetary policy rate at 6.50% at the last monetary policy meeting of the year and the first meeting of the new NBR Board. This decision comes in line with our expectations and the Bloomberg consensus. The updated inflation forecast of the NBR shows inflation on a higher path than previously anticipated and is now expected to enter the variation band of the target only in 2026. Significant uncertainties and risks stem from the future fiscal and income policy stance, given the fiscal-budgetary measures that might be implemented as of 2025 for budget consolidation purposes, in NBRs view. On Monday the quarterly Inflation Report will be published along with the new inflation projection.

We see the next NBR rate cut in the second quarter of 2025, though the interest rate outlook is a function of the structure, timing, and size of the widely expected fiscal consolidation package, which should be presented by the new government after the general and presidential elections. Provided that the structure of the fiscal adjustment weakens the domestic demand pressures, there could be room for the NBR to cut rates in the first quarter. However, some of the fiscal measures are likely to have a short-term inflationary impact. We see inflation ending this year at 4.5% y/y and 2025 at 3.7% y/y with core inflation remaining above the headline throughout the eight-quarters policy horizon. Interest rate differential versus central banks in the region as well as ECB and FED decisions/ expectations could also become important in our view in the context of NBR monetary policy decision at the beginning of 2025.

Labour market conditions and wage dynamics remain a source of concern for the NBR as was mentioned in the press release. Energy and food prices as well as crude oil prices amid geopolitical tensions continue to create a high degree of uncertainty in NBRs view.

Regarding economic growth, the central bank highlights that the latest data and analyses point to somewhat more modest quarterly increase of the economy for H2 2024 than previously envisaged. This shows that the first half of the year economic growth came as a negative surprise for the NBR as well. The NBR expects faster annual GDP growth in 3Q which is in line with our current assessment. Consumption remains robust, while the trade balance deficit showed some improvement in the first two months of 3Q24. On the other hand, a negative surprise might come from the agriculture as production data shows quite weak numbers in annual terms, most likely due to severe weather conditions.

Sentiment: predominantly hawkish