RO: NBR Preview: rate cuts unlikely in 2025
The NBR is widely seen keeping interest rates unchanged at the 8 July meeting. Inflation outlook has deteriorated, and, on net basis, the announced fiscal consolidation package is inflationary over the short-term. Uncertainties related to the impact of the increase in energy prices after the regulatory cap expired 1 July and announced measures to increase VAT rates and excise duties should postpone plans to reduce interest rates into 2026. These measures should be included in the updated inflation forecast due to be presented after 8 August meeting.
The NBR faced an unexpected and unwanted policy tightening with market rates jumping from the deposit facility to the credit facility between the two rounds of presidential elections due to the shift in banking system liquidity position vs NBR from a surplus to a deficit. This was the result of large central bank FX interventions to limit RON sell-off following the first round of May presidential elections. The effective rate based on weighted average NBR operations inched up to 5.99% in May from 5.50% (where it stood for the previous nine months). After the presidential runoff, the NBR has provided weekly liquidity via repo auctions at 6.50% key rate, which became the effective rate in June, as the FX depreciation pressures subsided. We see key rate unchanged until February 2026 meeting and a total of 150bp of rate cuts next year.
We forecast headline inflation at 7.5% by year-end assuming a rather moderate increase in electricity prices in July of about 30%, 60% pass-through form VAT hikes and 100% pass-through of the increase in excise duties. We see core inflation at 6.0% y/y at the end of 2025.
The NBR governor said at May press conference that further rate cuts depend on market/fiscal stability and may be considered in the second half of the year, after money market rates fall below the key rate level. He added that downward inflation trajectory is creating conditions to cut rates in the second half of the year, assuming fiscal/market stability, though the pass-through into inflation from weaker RON was not included in May forecast. Hence, quite a few stars need to align before NBR would resume cutting rates and it all depends on leaving fiscal uncertainties behind which could ease pressures on external borrowing for the government, unleash untapped EU funds, eventually shifting the banking system liquidity position vs NBR to a surplus. With the economy expected to expand well below potential for the second consecutive year and fiscal consolidation adding downside risks to economic growth, the central bank is likely to look-through the supply-side inflationary shocks once the inflation trajectory enters a firm downward path and the risk to inflation expectations subsides.
The NBR is likely comfortable with the new range for EUR/RON, with the governor saying the RON fairly valued in REER term at the May press conference. We perceive that 5.05-5.10 is the new central bank comfort range for the EUR/RON, as further RON weakness could add undesired fuel to the inflationary fire. FX vulnerability remains high due to large current account deficit, elevated risk premia and sovereign rating downgrade risks. Hence, higher cost of carry might be required to fence the RON.
Based on our LLM assessment, the tone of the NBR remained slightly hawkish at 16 May rate setting meeting. Persistent inflation, financial stability and fiscal uncertainties are the main concerns of the central bank. With high uncertainty being a key topic.
Market implications: negative for ROMGBs, neutral for RON.