Banca Naţională a României

The annual inflation rate went down in June to 10.25 percent – in line with forecasts –, from 10.64 percent in May, amid the faster annual decline in fuel prices and the slower growth in processed food prices.

In 2023 Q2 as a whole, the annual inflation rate saw, as expected, a considerably faster drop, down by 4.28 percentage points (from 14.53 percent in March). The decline was driven, in this period as well, mainly by energy and fuel price dynamics, which followed a steeper downtrend, under the impact of base effects, developments in crude oil prices and capping schemes for electricity and natural gas prices.

At the same time, the annual adjusted CORE2 inflation rate continued to decrease gradually, reaching 13.5 percent in June from 14.6 percent in March amid stronger disinflationary base effects, falling prices of commodities, primarily agri-food items, and the downward adjustment of short-term inflation expectations. The impact of these factors surpassed the opposite influences that continued to come from the gradual pass-through of higher corporate costs, including wage costs, into consumer prices, as well as from the preserved profit margins, in the context of still robust consumer demand, but also from the hike in the prices of some imported goods.

The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 9.3 percent in June from 12.1 percent in March 2023. Furthermore, the average annual CPI inflation rate and the average HICP inflation rate fell to 14.2 percent and 12.5 percent respectively in June from 15.3 percent and 13.2 percent respectively in March, remaining below the levels prevailing in the region and the Baltic countries.

The new statistical data reconfirm the slowdown in economic growth in 2023 Q1 to 0.2 percent from 1.0 percent in the previous three months (quarterly change), which implies a relatively pronounced narrowing of excess aggregate demand over this period.

At the same time, in 2023 Q1 the annual growth rate of GDP shrank significantly to 2.4 percent from 4.5 percent in 2022 Q4. According to the new data, the decrease was driven by the change in inventories, while the annual rate of increase of household consumption posted a more visible step-up and the dynamics of gross fixed capital formation saw only a mild decrease, remaining at a double-digit level. Moreover, the impact of net exports became expansionary again, given the widening of the positive differential between the dynamics of exports of goods and services, in terms of volume, and those of imports, which continued to drop at a faster tempo. Against this background, trade deficit and current account deficit recorded substantial decreases in 2023 Q1 versus 2022 Q1, owing inter alia to the improved terms of trade.

The latest data and analyses point to subdued, and more moderate than previously anticipated, economic growth in 2023 Q2 and Q3, implying further relatively low annual GDP dynamics.

Thus, April through May, retail trade and motor vehicles and motorcycles sales posted a slower rise in annual terms, and the growth rate of services to households saw a markedly faster deceleration. At the same time, industrial output witnessed a larger year-on-year contraction, whereas the increase in the volume of construction works continued to lose momentum, albeit at a much slower pace than in the previous three months. However, the annual growth rate of exports of goods and services continued to outpace significantly that of imports, although it fell somewhat more strongly, thus causing trade deficit to see a faster annual decline over this period. Conversely, the current account deficit almost halted its year-on-year narrowing, as a result of the sharp worsening in the primary income balance on account of the outflows of reinvested earnings and dividends distributed.

Looking at the labour market, recent data show a brisker increase in the number of employees economy-wide in April-May, as well as a drop in the ILO unemployment rate to 5.4 percent in June, alongside a steeper upward path in the particularly high annual dynamics of unit labour costs in industry in the first two months of Q2. At the same time, the surveys show that employment intentions over the very short horizon neared record highs in July, while the labour shortage reported by companies rose, in industry as well.

The main interbank money market rates continued to decrease slowly in July, while yields on government securities saw a faster decline in the first part of the month, before embarking on an upward course – in line with developments in advanced economies and in the region – amid investors’ revised expectations on the prospects for the Fed’s monetary policy stance, given the stronger-than-expected growth of the economy and the resilience of the labour market in the USA.

The local currency posted a strengthening trend vis-à-vis the euro for most of July, inter alia under the influence of one-off or seasonal domestic factors, after having softened mildly in the prior two months. Against the US dollar, the leu recorded a notable appreciation, as a result of the significant weakening of the American currency on global financial markets in the first half of the period.

The annual growth rate of credit to the private sector continued to slow down rather swiftly in June, reaching 6.4 percent from 7.9 percent in May, as the particularly fast dynamics of the foreign currency component posted a steeper decline and the change in leu-denominated credit remained marginally positive. Therefore, the share of leu-denominated loans in credit to the private sector halted its descending path, inching up to 67.9 percent in June from 67.6 percent in May.

In today’s meeting, the NBR Board examined and approved the August 2023 Inflation Report, which incorporates the latest available data and information.

The updated forecast reconfirms the outlook for a further fall in the annual inflation rate over the next two years, on a somewhat higher-than-previously-anticipated path only in the medium segment of the projection horizon. Accordingly, the annual inflation rate will drop to single-digit levels at the beginning of 2023 Q3 and near the variation band of the target at the end of the projection horizon.

The fall will continue to be driven by supply-side factors, primarily disinflationary base effects and downward adjustments in some commodity prices, combined with the influences expected to come from the further contraction of excess aggregate demand, albeit at a slower tempo than in the previous projection.

The current inflation outlook is marked by heightened uncertainties, mainly stemming, in the short run, from the temporary cap on the mark-ups on basic food products but especially from the fiscal measures that are expected to be implemented with a view to boosting public revenues.

Nevertheless, major uncertainties and risks are associated with the future fiscal and income policy stance, given the characteristics of the budget execution in the first six months of the year and the recent pay rises in the public sector. Adding to these is the fiscal package likely to be adopted in order to carry on the budget consolidation, whose final configuration is yet unknown.

At the same time, sizeable uncertainties and risks to the prospects for economic activity, implicitly the medium-term inflation outlook, continue to arise from the war in Ukraine and the associated sanctions, whereas the absorption of EU funds, especially those under the Next Generation EU programme, is conditional on fulfilling strict milestones and targets. However, this is essential for carrying out the necessary structural reforms, energy transition included, as well as for counterbalancing, at least in part, the contractionary impact of supply-side shocks, compounded by the tightening of economic and financial conditions worldwide.

The Fed’s and the ECB’s monetary policy decisions, as well as the stance of central banks in the region continue to be relevant.

In the meeting held today, 7 August 2023, based on the currently available data and assessments, as well as in light of the very elevated uncertainty, the NBR Board decided to keep the monetary policy rate at 7.00 percent per annum. Moreover, it decided to leave unchanged the lending (Lombard) facility rate at 8.00 percent per annum and the deposit facility rate at 6.00 percent per annum. 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 bring the annual inflation rate back in line with the 2.5 percent ±1 percentage point flat target on a lasting basis, inter alia by anchoring inflation expectations over the medium term, in a manner conducive to achieving sustainable economic growth. At the current juncture, the balanced macroeconomic policy mix and the implementation of structural reforms, also 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 new quarterly Inflation Report will be presented to the public in a press conference on 9 August 2023 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 18 August 2023 at 3:00 p.m.

The next monetary policy meeting of the NBR Board will be held on 5 October 2023.