As expected, the BNR kept the key interest rate at 7% p.a. on Tuesday despite inflation being below the monetary policy rate.

10 important points from the press release of the BNR:

• In 2023, the annual inflation rate decreased by 9.76 percentage points (from 16.38% in December 2022) against the backdrop of large, almost equal contributions from lower prices for processed food products and energy prices, according to the BNR press release.

• The latest data and analysis suggest that economic growth slowed slightly in the fourth quarter of 2023 and the first quarter of 2024 compared to the third quarter of 2023, implying an acceleration in annual terms.

• Thus, compared to the average pace of the III quarter, in the first two months of the IV quarter of 2023, the growth of retail turnover and services provided to the population resumed, and industrial production softened its annual decline. The volume of construction work continued to grow at double-digit rates annually thanks to the development of the engineering construction segment.

• In the labor market, employment also stagnated in October-November, and the BIM unemployment rate remained relatively flat in the fourth quarter of 2023, but double-digit annual growth in the industry’s unit labor cost rose sharply in November.

• Near-term employment intentions continued to decline sharply earlier this year, and labor shortages reported by companies rose very slightly after a significant decline recorded in the fourth quarter of 2023, and solely due to evolution in the services sector.

• Credit to the private sector slightly increased its annual growth rate in December 2023 to 6.4%, from 5.4% in November, amid continued acceleration in the growth of the lei component, as well as a slowdown in foreign currency lending, in mainly reflecting developments in the segment of non-financial companies. The share of the lei component in loans granted to the private sector slightly decreased in December 2023 to 68.4% from 68.5% in November.

• The BNR Board of Directors has analyzed and approved the February 2024 Inflation Report, a document that contains the latest available data and information. The updated forecast confirms the prospect of an increase in the annual inflation rate at the beginning of the current year – under the influence of the increase and introduction of indirect taxes and fees – and its subsequent decrease, but at a lower pace compared to 2023 and the previous forecast.

• Thus, after a likely increase in January to a level well below the previous forecast, annual inflation is expected to decline in December 2024 to close to the forecast value and reach the upper end of the target range at the end of next year.

• There are significant uncertainties and risks related to the future conduct of fiscal and revenue policies, given the dynamics of public sector wages and the full impact of the new pension legislation, as well as additional fiscal measures that may be implemented in the future to continue the consolidated budget, including in the context of the excessive deficit procedure and conditions attached to other agreements concluded with the EC.

• Absorption of European funds, mainly those related to the EU’s “Next Generation” program, is essential to achieve the necessary structural reforms, including the energy transition.