RO: NBR on hold, matching expectations

In line with the broad consensus, the NBR decided to keep the interest rates unchanged at the first meeting of 2025. Consequently, the key rate remains at 6.50%. We expect NBR to resume cutting rates in August and deliver three key rate cuts of 25bp each to 5.75% by end-2025.

The new assessments reconfirm the prospects for the annual inflation rate to decline in the first three months of 2025, yet on a higher-than-previously-anticipated path, notes NBR. End -2024 inflation came slightly above central banks expectations at 5.1% y/y vs 4.9% y/y the official forecast. This is mainly due to higher than anticipated fuel prices, primarily as a result of the significant appreciation of the US dollar on the international financial market, as it is mentioned in the press release. The disinflation process in the next months will result primarily on sizeable base effects and the deceleration of imported inflation. The signals are clear that the new inflation forecast which will be presented at the next meeting in February will most likely show a slight upward revision. What was in our view a highly likely hold decision, becomes even more probable in this context.

NBR is expecting a moderate quarterly economic growth in the last quarter of 2024 which is more or less in line with our current view, however due to unfavorable base effect the annual rate could likely come lower vs the previous quarter.

Core inflation ended 2024 at 5.6% y/y, exceeding the NBRs November forecast of 5.1% y/y. Notably, core inflation has stagnated at this 5.6% level for the past four months. The primary driver behind this stagnation is the reacceleration of core-food inflation, while core non-food and core services inflation have remained persistently high, further contributing to the elevated value. Over the course of 2024, core inflation decelerated from 8.4% y/y in Dec-23 to 5.6% y/y, marking a decline of approximately 2.8 percentage points. However, we anticipate a slower pace of deceleration in 2025, expecting core inflation to end the year at 4.0% y/y, remaining above the target band.

Fiscal uncertainties are likely an important focus point of the debate within the next meetings. This should keep the NBR in data-dependent mode. The timing of the next rate cut remains tied to a coherent and credible multiannual fiscal consolidation program and its structure.

The new government, though backed by a rather thin, but nevertheless stable parliamentary majority, adopted proper measures to contain further increase in rigid public spending and took some decisions to broaden the tax base. This is unlikely to be enough to comply with fiscal targets agreed with the EC. Additional adjustment is expected to be backloaded in the second half of the year, with the rerun of presidential elections scheduled for 4/18 May. This should postpone NBR decision to cut rates into the third quarter.

Weaker than expected domestic economic growth and market expectations for frontloaded rate cuts by the ECB and some regional central banks could be arguments for the doves. In the decision-making process, these dovish calls are likely to be strongly outweighed by the ongoing fiscal concerns, increased FX vulnerability due to elevated risk premia and sovereign rating risks, high and mostly upside inflation forecast uncertainties, while fast wage growth and strong consumer lending expansion continue to fuel household consumption.