The NBR will most likely remain on hold again and postpone the first rate cut until the second quarter of 2024. A better-than-expected inflation development at the end of 2023, which will naturally bring down the entire future profile, is helpful for the Bank and allow a little more room for officials to emphasize that monetary policy is sufficiently restrictive at this time.
The Bank’s new Inflation Report and updated forecasts are likely to show lower price pressures in the short and medium term compared to November projections. This is due to lower than expected inflation figures and the extension of the margin limit on essential food products for another two months. That said, these improvements in price pressures are not likely to come without some significant upside risks.
In this sense, we believe that the Bank’s main focus will be on wage growth dynamics as a key internal upside risk. Furthermore, the Bank’s firmer tone on the need for additional corrective measures on the fiscal front is likely to persist. Another fiscal package, if adopted sometime this year, will likely trap the economy (and especially private consumption) in an acceleration phase, so the inflationary impact of higher taxes will likely be stronger than the recent one. fiscal package, which was implemented when growth was quite low by historical standards.
On the international front, supply chains and commodity price risks will likely continue to dominate the NBR agenda, as tensions in the Red Sea and the Middle East continue to make headlines.
That said, with a growing and unprecedented liquidity surplus in the interbank market (RON 60.7 billion in January) and with the Robor 3M moving even closer to the deposit rate during the same month, the true stance of monetary policy remains much more flexible than the 6.00% to 8.00% interest rate range suggests. Record excess liquidity is also the key risk to our forecast for 150 basis point cuts by the end of the year, as the resulting easing pressures could diminish the need for rate cuts.