Romanian National Bank preview: sequentially is key

• Inflation: While the latest inflation developments have been rather on the upside of our central scenario, we maintain the view that we witnessed the peak headline in August at 15.3%. That said, chances for the September print to come slightly higher are not ignorable, with our current 15.2% estimate being heavily exposed to the usual forecast errors we’ve been seeing for a while now. Starting October however, stronger base effects will kick-in and the headline inflation should come lower by at least 1pp. All considered, our year-end forecast of 13.6% in 2022 is looking marginally optimistic given the persistently high energy prices, though we are not changing it at the moment. For end-2023 we maintain our 7.0% forecast, but the perspective of inflation hitting the NBR’s target band (1.5-3.5%) by the end of the two-year forecast horizon looks more distant now.

• Growth: On the macro front, as the eurozone economy is slowing down rapidly (probably already experiencing a recession) and most forecasts for 2023 already point to various degrees of GDP contraction (-0.8% ING’s house view) we believe that Romania’s capacity to fend-off the contractionary impact of these external developments is limited. The available high frequency data is so far limited to early 3Q22 and points to a contraction in industrial production and construction, while retail sales maintained a positive momentum. All considered, our already below-market GDP estimate for 2023 of 3.0% started to look overly optimistic and we are revising it to 1.8%. At the same time, we marginally revise the 2022 GDP growth estimate from 7.0% to 6.6% as a mild contraction in the third and/or fourth quarter cannot be excluded anymore. This assumes that no significant statistical data revisions will occur which, given the abnormally high growth from the first half of 2022, is not such a light assumption to make. Overall, growth concerns – and by extension the rapidly closing output gap – will likely resurface in the NBR’s policymakers discussions and it should point towards the dovish side of the NBR’s approach.

On the bond market, during September, the Romania government bond (ROMGBs) curve moved up about 70bp, resulting in a bear-steepening. The global sell-off has led the curve to its steepest shape since the second half of August, supported by issuance particularly at the belly and long end of the curve. The 10y yield has reached the 8.50% mark for the first time since July. However, we believe the global sell-off is still not over and the yield still has room to move closer to the 9.00% level. This view is also supported by CEE peers’ comparisons, which make ROMGBs look expensive at the moment. During September, the premium over Polish government bonds has fallen 60bp from local highs. On the other hand, we believe Romania is well positioned in relative terms within CEE for the coming winter and the slowdown in the global economy. Moreover, against its direct competitor Hungary, Romania has the advantage of the absence of EU money issues and benefit from stable FX. In the event of an end to the global sell-off and favourable European economic numbers, we believe ROMGBs are well positioned against peers.

On the FX side, the Romanian leu has moved back to 4.95 EUR/RON after a brief excursion to stronger levels and the NBR seems to have the situation fully under control, for now. We do not expect any changes in the short term, however, the global selling pressure on the CEE region is also affecting the RON market. Looking at the Hungarian forint and Polish zloty, we can assume that the NBR's FX defence costs have increased significantly over the last two weeks, indicating that stability cannot last forever. For now, we expect a shift higher in our forecast for the intervention level early next year. However, the winter months could bring increased pressure on FX and push the NBR to ease the plunger a little earlier.