Board of the National Bank of Romania decided to increase the monetary policy rate to 5.50 percent per annum, from 4.75 percent per annum, as of 8 August 2022. At the same time, the BNR sees a leveling of the inflation in the third quarter, followed by a gradual decrease in the subsequent period. However, the national bank does not rule out that there are factors that can overturn its estimates, especially from the perspective of the evolution of energy prices.
”The annual inflation rate remained stuck to an upward path in June, yet at a slower pace, as anticipated, climbing to 15.05 percent from 14.49 percent in the previous month, mainly due to the new hikes in processed food and fuel prices, partly offset by the drop in VFE prices.
In 2022 Q2 as a whole, the annual inflation rate saw a stronger rise than in the previous quarters (from 10.15 percent in March) and above expectations. Most of the increase came again from exogenous CPI components, primarily from the hefty and larger-than-anticipated hikes in electricity and natural gas prices, given the changes made to the price capping schemes in April, as well as the further high international prices. Additional influences stemmed from fuel prices, following the advance in the crude oil price, amid the war in Ukraine and the associated sanctions, but also due to the US dollar strengthening against the euro,”c-bank officials said.
The new statistical data reconfirm the strong economic growth in 2022 Q1, i.e. 5.1 percent against 2021 Q4. This implies a relatively moderate increase in the positive output gap in this period.
At the same time, the step-up in the annual dynamics of GDP in 2022 Q1, to 6.4 percent from 2.4 percent in 2021 Q4, is reconfirmed. Behind the swifter growth rate stood mainly private consumption, yet on account of other sub-components than purchases of goods and services – which reported a markedly lower increase in annual terms, inter alia amid a base effect –, while the contribution from the change in inventories came second in size. A notable contribution was also made by gross fixed capital formation, as a result of the strong re-acceleration against the same year-earlier period of both net investment in equipment (transport equipment included) and new construction works. In addition, net exports further acted towards improving economic growth – their contribution to annual GDP dynamics re-entering positive territory for the first time in the past five years –, as the rise in the annual change in the export volume of goods and services outpaced that in the import volume.
While also reflecting a relatively higher attractiveness of domestic currency deposits, the leu posted a slight appreciation trend against the euro in July, additionally fostered by seasonally-driven domestic developments.
In today’s meeting, the NBR Board examined and approved the August 2022 Inflation Report, which incorporates the latest available data and information.
The updated forecast shows the prospects for the annual inflation rate to level off in 2022 Q3 and gradually decline later on, yet on a path revised moderately upwards.
The prospects for the annual inflation rate to level off and decrease rely on a milder impact of global supply-side shocks – inter alia in the context of energy price capping schemes implemented until March 2023 –, as well as on the sizeable disinflationary base effects, alongside the influences from the likely rapid contraction and closing of the positive output gap in mid-2023, followed by the output gap widening into negative territory.
Against this background, the annual inflation rate is expected to post minor fluctuations in Q3, and then enter a gradual downward path for three quarters, but relatively fast afterwards, falling slightly below the mid-point of the target at the end of the projection horizon.
Uncertainties are, nevertheless, associated with the presumed impact, but also the duration of energy and fuel price capping and compensation schemes. Notable risks also continue to come from developments in energy commodity prices, as well as from the persistent bottlenecks in production and supply chains — in the context of the war in Ukraine and the related sanctions —, to which add those from the protracted drought domestically and in other European countries.
The war in Ukraine and the sanctions against Russia remain, however, a major source of uncertainties and risks to the outlook for economic activity, hence to medium-term inflation developments, through the possibly stronger effects exerted, via multiple channels, on consumer purchasing power and confidence, as well as on firms’ activity, profits and investment plans, but also by potentially affecting more severely the European/global economy and the risk perception towards economies in the region, with an unfavourable impact on financing costs.
At the same time, the absorption of EU funds, especially those under the Next Generation EU programme, is conditional on fulfilling strict milestones and targets for implementing the approved projects. However, it is essential for carrying out the necessary structural reforms, energy transition included, but also for counterbalancing, at least in part, the contractionary impact of supply-side shocks, compounded by the war in Ukraine and the related sanctions, as well as the effects of fiscal consolidation. It is vital to absorb and reap the full benefits of these funds.
Major uncertainties and risks are also associated, however, with the fiscal policy stance, given the requirement for further budget consolidation amid the excessive deficit procedure and the overall tightening trend of financing conditions, yet in a challenging economic and social environment domestically and globally, which led to the implementation of several packages of measures to support households and firms, with potential adverse implications for budget parameters. From this perspective, the coordinates of the envisaged budgetary revision are particularly important.
