Banca Naţională a României

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.

The annual adjusted CORE2 inflation rate further witnessed a steeper upward path in 2022 Q2, climbing from 7.1 percent in March to 9.8 percent in June, slightly above the forecast, particularly under the influence of new increases in processed food prices. Specifically, the evolution of this component continues to reflect the effects of surges in commodity prices, mainly agri-food prices, and of elevated energy and transportation costs, alongside the influences of production chain bottlenecks, compounded by high short-term inflation expectations, the release of pent-up 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 9.3 percent and 7.9 percent respectively in June, from 6.5 percent and 5.6 percent respectively in March 2022. 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. However, the annual increase in the negative trade balance re-accelerated, amid the relatively more unfavourable developments in import prices, while the current account deficit saw a considerably faster deepening trend against the same period of the previous year, inter alia as a result of the strong worsening in the primary income balance.

The latest data and analyses point to a quasi-standstill of economic activity both in 2022 Q2 and Q3, under the impact of the war in Ukraine and the associated sanctions. GDP developments in Q2 imply a marked decline in its annual growth rate during this period, yet amid the robust rise in private consumption, also on account of a base effect.

Relevant from this perspective is the re-acceleration in the annual growth of retail trade and services to households in April-May, counterbalanced only to a small extent by the large slowdown, to a marginally negative value, in the dynamics of motor vehicle and motorcycle trade. Conversely, industrial output saw a renewed widening in annual contraction, the volume of new manufacturing orders dropped as compared with the same year-ago period and the volume of new construction works almost stopped its increase in annual terms. At the same time, imports of goods and services posted significantly faster annual growth in the first two months of Q2, probably inter alia amid the adverse developments in external prices, which, along with the slower dynamics of exports, caused the high annual growth rate of trade deficit to almost double as compared with the Q1 average. However, the current account deficit posted a markedly lower annual increase than in the first quarter, amid the improved income balances, also with the contribution of inflows of EU funds to the current account.

The number of employees in the economy continued to rise at a sustained pace in April-May, almost entirely on account of hiring in the private sector, and the ILO unemployment rate further declined to 5.3 percent in June, yet remaining slightly above pre-pandemic values. Nevertheless, the steady upward trend over the past almost two years in the labour shortage came to a halt, while the hiring intentions for the three-month horizon declined somewhat, in the context of mixed sectoral developments, probably explained by the effects and uncertainties generated by the war in Ukraine and the sanctions imposed.

Looking at the financial market, the main interbank money market rates have risen at a faster pace in the recent period, prompted by the monetary policy rate hike in July and the central bank’s firm control over market liquidity. An important part in this process has been played by credit institutions’ expectations, in the context of the domestic and international inflationary environment, as well as of the outlook for a protraction in geopolitical tensions.

The yields on government securities posted, however, a slower advance, thereafter witnessing downward adjustments, in line with global developments in similar yields, amid the revision of economic growth expectations, given the faster normalisation of the monetary policy conduct by the Fed and the ECB, but also the protraction of the war in Ukraine and the extension of the associated sanctions. The average interest rate on new time deposits recorded a new significant hike in June, including in the household segment.

At this juncture, 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.

The annual dynamics of credit to the private sector picked up further in June, reaching 17.5 percent (16.5 percent in May), yet against the backdrop of a mild moderation in domestic currency lending, whose impact was counterbalanced by the significant step-up in the dynamics of foreign currency-denominated loans to non-financial corporations. The share of leu-denominated loans in credit to the private sector fell slightly to 72 percent (from 72.7 percent in May).

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. 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.

Also relevant are the ECB’s and the Fed’s prospective monetary policy stances, as well as the behaviour of central banks in the region.

In the meeting held today, 5 August 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 5.50 percent per annum from 4.75 percent per annum as of 8 August 2022. Moreover, it decided to raise the lending (Lombard) facility rate to 6.50 percent per annum from 5.75 percent per annum and the deposit facility rate to 4.50 percent per annum from 3.75 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.

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

The new quarterly Inflation Report will be presented to the public in a press conference on 9 August 2022 at 11:00 a.m. 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 19 August 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 5 October 2022.