Banca Naţională a României

The annual inflation rate continued to rise gradually in the first two months of 2022, contrary to expectations, climbing to 8.35 percent in January and to 8.53 percent in February, from 8.19 percent in December 2021. This time round, the exogenous CPI components had a disinflationary contribution overall, following the slower pace of increase of electricity and natural gas prices, amid a base effect and extended price capping schemes, which outweighed considerably the influences of the relatively more pronounced hike in fuel prices, VFE prices and administered prices.

The annual adjusted CORE2 inflation rate followed a faster-than-expected upward path in the first two months of 2022 Q1, going up to 5.2 percent in January and to 5.9 percent in February, from 4.7 percent in December 2021, mainly as a result of the step-up in broad-based increases in processed food prices. Therefore, the evolution of this component continues to reflect the effects of the surge in agri-food commodity prices and energy and transport costs, alongside the influences of persistent bottlenecks in production and supply chains, compounded by increasingly higher short-term inflation expectations, the resilience of demand in certain segments, as well as by the significant share of food items and imported goods in the CPI basket.

Average annual CPI inflation rate and average annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went up to 6.0 percent and 5.0 percent respectively in February 2022, from 5.0 percent and 4.1 percent respectively in December 2021.

Economic activity continued to weaken more than expected in 2021 Q4, falling by 0.1 percent versus the previous quarter, but solely on the back of the marked deterioration in the performance of agriculture. The developments make it likely for excess aggregate demand to remain low during this period, in line with February expectations, given inter alia the implications of the new revision of statistical data on economic growth in 2020 and 2021.

At the same time, annual GDP dynamics saw in 2021 Q4 a markedly stronger-than-anticipated decline, i.e. to 2.4 percent from 6.9 percent in Q3, but almost entirely on the back of the contribution of the change in inventories falling to a significant negative value. Household consumption made only a very slightly lower positive contribution – which thus remained particularly elevated –, while gross fixed capital formation recorded a somewhat improved contribution.

In turn, net exports made a slightly lower negative contribution to annual GDP dynamics, as the decrease in the change in imports of goods and services outpaced that of exports. Against this background, the annual increase in the negative trade balance decelerated considerably as against Q3, due also to the narrowing of the unfavourable differential between the dynamics of import prices and those of export prices. Conversely, the current account deficit widened in annual terms at a significantly faster pace, under the impact of the marked worsening of the secondary income balance, on account of a decrease in inflows of EU funds to the current account as compared to the same year-earlier period.

Recent developments in high-frequency indicators point to a slight, probably temporary, recovery in economic activity in 2022 Q1, implying however the deceleration in annual GDP growth in this period as well, due to an ongoing base effect.

Specifically, in January 2022, the annual dynamics of retail trade remained steady, being accompanied by a sharp decrease in the annual change in motor vehicle and motorcycle trade and especially in that in market services to households. By contrast, the annual dynamics of industrial output slightly re-entered positive territory, those of the value of new manufacturing orders doubled, whereas the volume of construction works posted a markedly faster growth. Moreover, the much stronger increase posted in January by the annual change in imports of goods and services as compared to that of exports was chiefly attributed to the unfavourable developments in external prices. However, this caused the trade deficit to surge by almost three times in January 2022 against January 2021 and the current account deficit to post an even stronger increase in annual terms, inter alia due to the mild worsening of the primary income balance.

Labour market has also witnessed mixed developments in the recent period. Thus, the number of employees economy-wide rose slightly in December 2021 and January 2022 to a record high, whereas the ILO unemployment rate climbed to 5.7 percent in December 2021 and remained unchanged in January and February 2022, above the historical low touched in the summer of 2019. The labour shortage reported by companies posted, however, a faster increase January through March 2022, while remaining considerably below its peak. The hiring intentions for the following three months, as shown by the DG-ECFIN survey, increased in January-February, but saw a moderate downward adjustment in March, amid the high uncertainties generated by Russia’s invasion of Ukraine and the retaliatory international sanctions.

Looking at the financial market, the main interbank money market rates witnessed a faster pick-up in February and March 2022, reaching nine-year highs, following the new monetary policy rate hike, as well as amid the pronounced tightening of liquidity conditions and expectations on a further increase in the key rate. Yields on government securities saw their generally upward path steepen as well, posting marked rises in the early days of March, only partly corrected afterwards, given the abrupt deterioration of financial investor sentiment, especially vis-à-vis markets in the region, following the outbreak of the war in Ukraine and the imposition of international sanctions. At this juncture, the EUR/RON exchange rate also recorded an upward adjustment, albeit far more modest than those observed in the region, before quasi-stabilising at the new levels, in the context of the NBR’s liquidity management actions, but also amid the subsequent relative abatement of volatility on the international financial market, underpinned inter alia by the Fed launching the policy rate hiking cycle.

The annual growth rate of credit to the private sector climbed further in double-digit territory during the first two months of 2022, reaching 15.8 percent in February and 15.49 percent over the period as a whole, from 14.31 percent in 2021 Q4. This was mainly ascribable to a renewed step-up in the particularly strong dynamics of the leu-denominated component – to a period average of 19.8 percent –, to which added the faster pace of increase of forex loans. The share of leu-denominated loans in credit to the private sector widened to 72.5 percent in February.

According to current assessments, the annual inflation rate is expected to rise somewhat more steeply in the coming months than anticipated in February, under the impact of supply-side shocks.

Behind the renewed worsening of the near-term inflation outlook stand the much higher increases expected for fuel prices, and especially for processed food prices, mainly due to the stronger advance in crude oil and agri-food commodity prices, amid the war in Ukraine and the international sanctions in place. The inflationary effects thus exerted are foreseen to prevail in the near term over the substantial disinflationary impact presumably generated by the one-year extension of capping schemes for electricity and natural gas prices for households. However, significant uncertainties are still associated with how the impact of these schemes is assessed and included in the CPI calculation.

Uncertainties and risks surrounding medium-term prospects increase, nevertheless, considerably owing to the war in Ukraine and the associated sanctions, which pose a new sizeable supply-side shock globally. This exerts divergent effects on inflation and economic activity domestically, mainly by compounding the energy crisis and the production chain bottlenecks, but also via other channels, such as economy and inflation dynamics in Europe/worldwide, consumer and investor confidence, as well as risk perception towards the region, with an impact on financing costs.

A major source of uncertainties and risks also remains 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. At the same time, the improvement in the epidemiological situation on the domestic front led to the end of the state of alert in the first 10-day period of March 2022 and to the lifting of all mobility restrictions, with favourable effects on economic activity.

Moreover, uncertainties and risks are associated with the future fiscal policy stance, given the requirement for further fiscal consolidation in line with the commitments under the excessive deficit procedure, yet in a challenging economic and social environment domestically and globally, marked by the implications of the war in Ukraine and of the sanctions imposed on Russia, but also by the tightening trend of financing conditions.

In the meeting held today, 5 April 2022, based on the currently available data and assessments, as well as in light of the very elevated uncertainty, the NBR Board decided to increase the monetary policy rate to 3.00 percent per annum from 2.50 percent per annum as of 6 April 2022. Moreover, it decided to raise the lending (Lombard) facility rate to 4.00 percent per annum from 3.50 percent per annum and the deposit facility rate to 2.00 percent per annum from 1.50 percent per annum, as well as to maintain firm control over money market liquidity. Furthermore, the NBR Board decided to keep 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 anchor inflation expectations over the medium term, as well as to foster saving through higher bank rates, so as to bring back the annual inflation rate in line with the 2.5 percent ±1 percentage point flat target on a lasting basis, in a manner conducive to achieving sustainable economic growth in the context of the fiscal consolidation process.

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 website on 15 April 2022 at 3:00 p.m.

In line with the announced calendar, the next monetary policy meeting of the NBR Board will be held on 10 May 2022.