Banca Naţională a României

The annual inflation rate climbed to 7.94 percent in October 2021, from 6.29 percent in September, before falling to 7.80 percent in November under the impact of the capping and compensation of electricity and natural gas prices for households, thus mildly exceeding the forecast at the end of the first two months of Q4. Its increase continued to be mainly driven by exogenous CPI components, with major influences coming in this period especially from the hefty hike in the prices of fuels, i.e. the non-petrol-diesel subgroup, and to a smaller extent from higher VFE prices.

The annual adjusted CORE2 inflation rate further rose somewhat faster than anticipated, up from 3.6 percent in September to 4.0 percent in October and 4.3 percent in November. This reflected the effects of the surge in agri-food commodity prices and energy and transport costs, as well as the influences of persistent bottlenecks in production and supply chains, alongside those arising from measures to protect against COVID-19, all compounded by increasingly higher short-term inflation expectations.

Average annual CPI inflation rate and average annual inflation rate calculated based on the Harmonised Index of Consumer Prices went up to 4.5 percent and 3.7 percent respectively in November, from 3.6 percent and 2.9 percent respectively in September 2021.

Economic growth slowed down considerably in 2021 Q3, to 0.4 percent from 1.5 percent in Q2, contrary to expectations. This makes it likely for excess aggregate demand to shrink in this period to a much lower-than-forecasted value, also due to the recent notable downward revision of statistical data on the pace of economic advance in 2021 H1, which implies as well that in Q2 the pre-pandemic GDP level was surpassed by a relatively more modest margin.

Moreover, annual GDP dynamics saw in Q3 a visibly stronger-than-anticipated decline, i.e. to 7.4 percent from 13.9 percent in Q2, while remaining however high from a historical perspective, mainly on the back of private consumption, but also of the unusually large contribution made, in this period as well, by the change in inventories. On the other hand, the contribution of gross fixed capital formation unexpectedly turned marginally negative for the first time in the past 11 quarters, mainly on account of a sharper contraction in capital repair works, which outweighed the impact of the slight annual increases in new construction works and net investments in equipment (transport equipment included).

Net exports further made a negative contribution to annual GDP dynamics, yet this narrowed notably versus the previous quarter, even amid a somewhat faster decline in the annual change in exports of goods and services than that in imports thereof. However, trade deficit deepened in annual terms at a much stronger pace in Q3, given the relatively more unfavourable developments in the prices of imported goods, while the current account deficit continued to see a slowdown in the annual growth rate, albeit much more modest than in Q2, due to improved annual rates of change of income balances.

Recent developments in high-frequency indicators point to a standstill in economic activity in 2021 Q4, also in the context of the fourth pandemic wave, the energy crisis and supply bottlenecks, entailing the fall in annual GDP dynamics to a significantly lower value than that anticipated in November 2021.

Among the relevant developments were the significant deceleration seen in October by the annual growth rates of retail trade, sales of motor vehicles and market services to households and the plunge in industrial output and in the portfolio of manufacturing orders versus the same year-ago period. At the same time, the volume of construction works posted a faster year-on-year decline in October owing to developments in the non-residential segment and civil engineering works, whereas exports of goods and services recorded a considerable drop in their annual change, much more pronounced than that in import dynamics, which led to a further step-up in the annual increase in trade deficit. Against this background, but also as a result of a renewed notable worsening of income balances, the current account deficit saw its widening trend in annual terms re-accelerate strongly, its cumulative value for the first 10 months of 2021 exceeding by around 58 percent that reported in the same year-earlier period.

September through October 2021, labour market developments reflected the influences from the worsening epidemiological situation and tighter mobility restrictions, as well as from more severe disruptions in global supply chains and sharp increases in energy and other commodity costs. Thus, the number of employees economy-wide ceased to rise in September and went up marginally in October, very slightly exceeding the pre-pandemic level. Moreover, in September, the unemployment rate reversed only part of the significant increases seen in the previous two months, while in October it remained unchanged, hence staying visibly above pre-pandemic values.

Looking at the financial market, the main interbank money market rates went further up at a relatively fast pace in November and December 2021, hitting 21-month highs, following the new policy rate hike, as well as amid tight liquidity conditions and expectations on a further increase in the key rate, strengthened also by developments in the region. Yields on government securities continued to rise as well, albeit at a relatively slower pace, also in the context of abating political tensions and the mixed behaviour of long-term government bond yields in the advanced and emerging economies, remaining significantly above those in the region across the entire maturity spectrum. At this juncture, the EUR/RON exchange rate stayed relatively stable at the higher readings recorded at the end of 2021 Q3.

The annual growth rate of credit to the private sector rose further in double-digit territory October through November, reaching 14.1 percent on average, against 12.9 percent in Q3, given the protracted increase in the particularly strong dynamics of the leu-denominated component, supported, inter alia, by government programmes, but also on account of a mild step-up in forex loans. Leu-denominated loans saw their annual growth rate accelerate to 18.5 percent in this period, from 17.8 percent in Q3, with their share in total widening to 72.0 percent in November.

According to current assessments, the annual inflation rate is likely to rise gradually over the months ahead, under the impact of supply-side shocks, exceeding the values shown over this time horizon by the medium-term forecast last November. Behind the worsening of the short-term inflation outlook stand the expected higher increases in electricity and natural gas prices – even amid the implementation of measures to compensate and cap such hikes – as well as in processed food prices, mainly due to the advance in energy and agri-food commodity prices. Their impact is likely to amplify and further prolong the positive deviation of the annual inflation rate from the upper bound of the variation band of the target, especially after the measures to compensate and cap energy price increases cease, but also to trigger disinflationary base effects over the longer time horizon.

However, significant uncertainties still linger over the effects of temporary measures to compensate and cap price hikes for electricity and natural gas for households, as well as over how they will be assessed and included in the CPI calculation. Moreover, uncertainties and risks continue to stem from developments in commodity prices, particularly of energy and agri-food, as well as from bottlenecks in global production and supply chains.

At the same time, the evolution of the pandemic and the ensuing containment measures remains a major source of uncertainties and risks to the forecast, over the short term at least, amid the nationwide expansion trend of the pandemic wave entailed by the more contagious Omicron variant, as well as given the insufficient progress of vaccination domestically, and because of the potential impact of this wave on Europe’s economies, which are also hit hard by the energy crisis and the persistent supply bottlenecks.

Uncertainties and risks also continue to be associated with the fiscal policy stance, given, on the one hand, the 2021 government deficit potentially smaller than the target and, on the other hand, the co-ordinates of the budget programme approved for this year, aiming at a step-up in fiscal consolidation, in line with the commitments under the excessive deficit procedure, yet in a challenging economic and social environment domestically and globally. A source of uncertainties and risks remains also the absorption of EU funds – especially those under the Next Generation EU programme – that is conditional on fulfilling strict milestones and targets for implementing the approved projects.

In the meeting held today, 10 January 2022, based on the currently available data and assessments, and in light of the elevated uncertainty, the NBR Board decided to increase the monetary policy rate to 2.00 percent per annum, from 1.75 percent per annum, as of 11 January 2022, and to maintain firm control over money market liquidity. Moreover, the NBR Board decided to extend the symmetric corridor of interest rates on standing facilities around the policy rate to ±1.00 percentage point from ±0.75 percentage points, implying that the lending (Lombard) facility rate will be raised to 3.00 percent per annum, from 2.50 percent per annum, while the deposit facility rate will be kept at 1.00 percent per annum. These decisions are circumscribed to the process of gradual normalisation of the monetary policy conduct that the NBR is carrying out, amid high uncertainties. At the same time, the NBR Board decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The NBR Board decisions aim to bring back and maintain the annual inflation rate in line with the 2.5 percent ±1 percentage point flat inflation target, inter alia via the anchoring of inflation expectations over the longer time horizon, in a manner conducive to achieving sustainable economic growth in the context of the fiscal consolidation process, while safeguarding financial stability.

The NBR closely monitors developments in the domestic and international environment and stands ready to use the tools at its disposal to achieve the fundamental objective of price stability in the medium term.

The account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the NBR’s website on 20 January 2022 at 3:00 p.m.

In line with the announced calendar, the next monetary policy meeting of the NBR Board is scheduled for 9 February 2022.