The NBR kept the key interest rate in line with the expectations of economists and analysts. According to a report by Erste Bank, the head of the NBR ruled out discussing interest rate cuts until inflation falls “significantly” and the process of deflation becomes truly irreversible.

At the same time, Iserescu suggested that discussions about lowering rates could begin as soon as inflation falls below the key rate, that is, sometime in the second quarter of the year.

Despite inflation falling below the key rate in November, economists say we will see another inflation boost in the first quarter as a result of the government’s fiscal measures.

What the issue of the BNR shows:

• Annual inflation accelerated its decline more than expected in the first two months of the fourth quarter of 2023, easing to 6.72 percent in November from 8.83 percent in September, as food and energy price increases continued to slow, and as the result of cheaper fuel

• Economic activity slowed significantly in the third quarter of 2023 to 0.9 percent from 1.6 percent in the previous three months (quarter-on-quarter change), but less than forecast

• Compared to the same period last year, GDP growth edged up slightly in the third quarter to 1.1 percent from 1.0 percent in the second quarter, thus remaining modest from a historical perspective, given that fluctuations in inventories and – increased the already very high contractionary influence, and the contribution of public administration consumption became somewhat negative.

• The latest data points to a slight slowdown in quarterly GDP growth in the fourth quarter of 2023, but points to stronger annualized economic growth during this period than previously forecast.

• In October 2023, retail sales and services provided to the public resumed growth compared to the corresponding period of the previous year, while the still high annual dynamics of sales of cars and motorcycles significantly softened their decline.

• At the same time, industrial production significantly slowed its year-over-year decline, and construction continued to grow at double-digit annual rates, albeit slowing from the third quarter.

• On the labor market, the latest data indicate a halt in the monthly increase in the number of people employed in the economy in September-October and a relatively stable maintenance of the BIM unemployment rate, including in November. According to expert surveys, employment intentions in the very short time horizon underlined their decline in the fourth quarter of 2023, and labor shortages reported by companies have narrowed significantly.

• The annual inflation rate will increase in the first month of this year and then resume a gradual decline on a lower trajectory than indicated in the medium-term forecast for November 2023. The increase will be driven by the increase and introduction in January of indirect taxes and fees in order to continue fiscal consolidation

• However, uncertainty and risks to the inflation outlook arise from the comprehensive package of fiscal and budgetary measures recently introduced to support the fiscal consolidation process, as well as from the restriction on commercial applications for staple food products, which is due to expire in February 2024.

• Significant uncertainties and risks are associated with the future conduct of fiscal and revenue policy, taking into account the implementation of the budget in 2023 and the coordinates of the approved budget program for 2024, as well as the consequences of new legislation on pension provision and wage dynamics in the public sector. sector, which could require the addition in the future of a package of corrective fiscal and budgetary measures, including in the context of the excessive deficit procedure and conditions added to other agreements concluded with the EC.

• Uncertainty and risks regarding the outlook for economic activity, in particular the medium-term evolution of inflation, continue to generate the war in Ukraine and the conflict in the Middle East, as well as economic development in Europe, especially in Germany, which is lower than expected. At the same time, the utilization of European funds, mainly those related to the EU Next Generation program, depends on the implementation of strict goals and guidelines. However, it is important to achieve the necessary structural reforms, including the energy transition, as well as to offset, at least partially, the restraining effects of geopolitical conflicts and strengthening economic and financial conditions at the international level.