RO: NBR Preview: ‘on hold’ for longer

The NBR is widely seen keeping interest rates unchanged at the 15 January meeting. We expect NBR to resume cutting rates in August and deliver three key rate cuts of 25bp each to 5.75% by end-2025.

Fiscal uncertainties are likely to dominate the debate within this Board meeting as well. This should keep the NBR in data-dependent mode. The timing of the next rate cut remains a function of 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.

Market implications: neutral for RON and ROMGBs.