In its meeting of 5 October 2022, the Board of the National Bank of Romania decided:
- to increase the monetary policy rate to 6.25 percent per annum from 5.50 percent per annum as of 6 October 2022; ;
- to raise the lending (Lombard) facility rate to 7.25 percent per annum from 6.50 percent per annum and the deposit facility rate to 5.25 percent per annum from 4.50 percent per annum as of 6 October 2022;
- to maintain firm control over money market liquidity;
- to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The annual inflation rate reached 15.32 percent in August, marginally above the forecast, after having fallen to 14.96 percent in July, from 15.05 percent in June. The increase was almost entirely driven by the continued hike in food prices, including the VFE component, however largely counterbalanced by the decline in fuel prices (amid motor fuel price compensation and lower oil prices), as well as by the base effects associated with developments in energy prices.
The annual adjusted CORE2 inflation rate continued to climb at a sustained pace in the first two months of 2022 Q3, albeit slower than in the previous quarters, going up to 10.4 percent in July, from 9.8 percent in June, and to 11.2 percent in August, slightly above the forecast, mainly owing to new rises in processed food prices. Thus, the evolution of this component continues to reflect the effects of large hikes in agri-food commodity prices and higher energy and transport costs, alongside the influences of bottlenecks in production chains. These were 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.
Annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) moved up to 13.3 percent in August, from 13.0 percent in June. Furthermore, average CPI inflation rate and average HICP inflation rate rose to 11.0 percent and 9.5 percent in August, from 9.3 percent and 7.9 percent respectively in June 2022.
The inflationary effects of supply-side shocks continue to increase in Europe and other advanced countries, with the dynamics of core inflation being relevant in this respect. In the euro area, the annual CPI inflation rate reached 10 percent in September, while in Romania’s neighbouring countries it ranges between 15 percent and 19 percent.
Economic growth slowed down considerably in 2022 Q2 versus the previous quarter, to 2.1 percent from 5.1 percent in Q1, yet much more modestly than anticipated. This makes it likely for the excess aggregate demand to see a moderate rise in this period too, contrary to expectations.
Annual GDP growth saw only a slight deceleration in 2022 Q2, to 5.3 percent, from 6.4 percent in Q1, thus remaining significantly above the forecasts. However, the largest contribution to economic growth came from the change in inventories (7.3 percentage points), while the contribution from private consumption – ranking second in terms of size – diminished considerably versus the previous quarter (to 4.7 percentage points) and that of gross fixed capital formation remained very modest, although on a slight increase. At the same time, the contribution of net exports saw a renewed strong contraction, given the slowdown in the annual dynamics of exports, concurrently with the significant re-acceleration in the annual dynamics of the imports of goods and services.
The latest high-frequency indicators point to a strong deceleration in the economic growth in 2022 Q3 versus Q2, under the impact of the escalation of the war in Ukraine and the extension of the associated sanctions. However, this implies a significant step-up in the annual growth rate of GDP over this period on account of a base effect, but with decelerating private consumption increase.
The slowdown in the annual dynamics of retail trade and motor vehicle and motorcycle trade, but especially of services to households in July is relevant from this perspective. At the same time, industrial output and the volume of new orders in manufacturing posted larger annual contractions, but the volume of construction works witnessed a significant step-up in annual terms.
Furthermore, the annual change of exports of goods and services declined marginally in July, while that of imports picked up slightly, inter alia against the backdrop of unfavourable developments in external prices. This led to a renewed advance in the fast annual growth rate of trade deficit compared to the Q2 average, and especially in the annual dynamics of the current account deficit, which also reflected a deterioration in the secondary income balance during this month.
The rise in the number of employees economy-wide lost pace in June-July, on the back of private sector developments, while the drop in the ILO unemployment rate to 5.1 percent in August was accompanied during 2022 Q2 by a slight contraction in labour demand. Moreover, the latest surveys indicate a slight decrease in the labour shortage reported by companies, after its continuous increase over the last six quarters, as well as a relative weakening of hiring intentions in the near run, in the context of the extremely high energy costs and the uncertainties generated by the war in Ukraine and the related increasingly strict sanctions.
Looking at the financial market, the main interbank money market rates have recently stabilised marginally above the values reached towards end-July, after slight downward adjustments recorded in August, on the backdrop of the latest monetary policy decision and the central bank’s forward guidance. In turn, yields on government securities partly recovered the decreases seen in July-August and followed a moderately upward path in September, similarly to developments in advanced economies and in the region, amid the firm monetary policy tightening by major central banks, associated with a worsening of global financial market sentiment. However, the average interest rate on new loans, but also that on new time deposits posted a markedly faster growth July through August, including in the household segment.
Against this background, the leu fully corrected in September the significant appreciation versus the euro recorded July through August, which had been strongly driven by domestic seasonal developments as well. Against the US dollar, the leu depreciated following the movements on international financial markets.
The double-digit annual dynamics of credit to the private sector embarked on a downward path at the beginning of H2, gradually shrinking to 15.9 percent in August (from 17.5 percent in June), amid the steeper drop in the high dynamics of the domestic currency component. As a result, the share of leu-denominated loans in credit to the private sector fell slightly to 71.8 percent in August (against 72.0 percent in June).
According to current assessments, the annual inflation rate will probably stick to an upward path towards year-end, under the impact of supply-side shocks, yet at a visibly slower pace. Behind the additional worsening of the near-term inflation outlook stand the faster growth rates anticipated over the following months for the prices of natural gas and electricity – inter alia amid the changes made to the electricity price capping scheme –, as well as for food prices. The latter is seen to be influenced by the hefty advance in agri-food commodity prices, owing to the war in Ukraine and the associated sanctions, but also to the protracted and widespread drought in Europe this summer. The impact of these factors will only partly be counterbalanced by the disinflationary base effects anticipated to occur in the near run inter alia for fuels.
The escalation of the war in Ukraine and the related increasingly harsh sanctions generate, however, considerable 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.
Furthermore, 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.
Major uncertainties and risks are also associated 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.
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 October 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 6.25 percent per annum from 5.50 percent per annum as of 6 October 2022. Moreover, it decided to raise the lending (Lombard) facility rate to 7.25 percent per annum from 6.50 percent per annum and the deposit facility rate to 5.25 percent per annum from 4.50 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. At the current juncture, a balanced macroeconomic policy mix and the implementation of structural reforms inter alia by using EU funds to foster the growth potential over the long term are of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand adverse developments.
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 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 October 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 8 November 2022.