Still, the NBR retains ample capacity to support the unit over the coming months. The NBR’s stock of foreign reserves also rose sharply by 30.8% over 2023 to USD72.9bn (EUR56.4bn). This increase was supported by an ongoing liquidity line with the European Central Bank (ECB), which expired in January 2024, financing from the EU and issuances of foreign currency public debt garnering marked investor interest. We estimate that this led to Romania’s reserves equating to 4.8 months of imports at the end of 2023, up from 3.7 months a year prior, and representing an increase in the NBR’s ability to continue intervening in foreign exchange markets over the short term. The NBR has also retained a hawkish monetary policy stance compared to its CEE peers. We expect the bank to only lower its policy rate by 75 basis points from 7.00% to 6.25% by year-end to maintain its rate differential relative to the ECB’s.
Long-Term Outlook (six-to-24 months)
Though currency overvaluation and longstanding macroeconomic imbalances will lead the leu to weaken over the coming quarters, we expect only moderate depreciation from a 2024 average of RON4.98/EUR to RON5.01/EUR over 2025. The NBR’s February 2024 projections saw inflation remaining above the upper bound of its 2.5% ±1.0 percentage point target range until Q4 2025, a delay compared to the November 2023 projection of mid-2025. The slower decline of Romanian inflation compared to its peers will incentivise the NBR to continue limiting the leu’s depreciation until price growth returns to target. However, the leu’s prolonged nominal stability amid elevated domestic price growth outpacing that of other European markets has led to its real effective exchange rate surging (see charts below), being 9.4% above its five-year average and 11.7% above the 10-year average. Though overvaluation is weighing on the competitiveness of Romanian exports, we expect the NBR to continue prioritising currency and price stability over 2024 and 2025.
