Banca Naţională a României

The annual inflation rate surged again in March 2022, climbing to 10.15 percent from 8.53 percent in February, mainly following a stronger pick-up in processed food and fuel prices, under the impact of the sharp rise in agri-food commodity and crude oil prices, once with Russia’s invasion of Ukraine and the imposition of international sanctions.

In 2022 Q1, the annual inflation rate thus recorded a further significant, higher-than-expected increase (from 8.19 percent in December 2021), with exogenous CPI components making however a far more modest contribution, given the capping schemes for households’ energy bill. Against this background, the slower growth rates of electricity and natural gas prices in Q1 have largely offset the influences of the strong rises in fuel and VFE prices.

The annual adjusted CORE2 inflation rate followed a markedly faster-than-expected upward path in 2022 Q1, going up from 4.7 percent in December 2021 to 7.1 percent in March. The evolution of this component continues to reflect the effects of almost across-the-board surges in commodity prices, mainly agri-food prices, and of elevated energy and transport costs, alongside the influences of production chain bottlenecks, compounded domestically by high 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.

Therefore, the fast increase in the annual inflation rate in 2022 Q1 continued to come from global supply-side shocks, heightened during this period by the outbreak of the war in Ukraine and the retaliatory sanctions, which sped up the strong upward path of inflation worldwide, including in a number of European countries. Thus, sharp rises in the annual inflation rate, core inflation included, were reported by many countries in Europe and by the USA, amid an unprecedented macroeconomic situation in recent decades.

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 6.5 percent and 5.6 percent respectively in March 2022, from 5.0 percent and 4.1 percent respectively in December 2021.

The new statistical data reconfirm the fall by 0.1 percent in economic activity in 2021 Q4 against the previous quarter, on the back of the marked deterioration in the performance of agriculture, which caused excess aggregate demand to remain low during this period, in line with February expectations, inter alia as a result of the recent revision of statistical data on GDP developments in 2020 and 2021.

Moreover, a deceleration in annual GDP dynamics was reconfirmed, i.e. to 2.4 percent in 2021 Q4 from 6.9 percent in the previous three months, on account of the notably slower pace of domestic absorption. Conversely, net exports made a lower negative contribution to GDP growth, as the annual dynamics of the import volume of goods and services declined faster than those of the export volume. 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 change in import prices and that in export prices. However, the current account deficit widened in annual terms at a significantly faster pace, under the impact of the worsening of the secondary income balance, with its share of GDP climbing consequently to 7.0 percent in 2021 as a whole, from 5.0 percent in 2020.

The latest statistical data and analyses point to a slight re-acceleration of economic growth in 2022 Q1, followed however by a quasi-standstill in Q2, under the impact of the war in Ukraine and the associated sanctions. GDP developments in Q1 imply nevertheless a slight slowdown in its annual dynamics during this period too, amid a further base effect, as also suggested by the high-frequency indicators.

Thus, the quasi-steady annual growth rates of retail trade and of sales of motor vehicles and motorcycles in January-February were accompanied by a plunge in the annual dynamics of market services to households. However, the annual dynamics of industrial output saw a mild pick-up, thus re-entering positive territory, whereas the volume of construction works recorded a markedly faster growth in annual terms. Moreover, the somewhat stronger advance posted in January-February overall by the annual change in imports of goods and services as compared to that in exports reflected chiefly the unfavourable effect of developments in external prices. This led however to a significantly faster widening of trade deficit versus the same year-earlier period, but to a more modest rise in the current account deficit, given the improvement in the secondary income balance, including on account of inflows of EU funds to the current account.

At the same time, the number of employees in the economy stayed on a slightly upward trend in the first two months of 2022, yet amid uneven developments across sectors, while the ILO unemployment rate remained flat at 5.7 percent in Q1, visibly above pre-pandemic values and significantly above the historical low recorded in August 2019. The labour shortage reported by companies posted however a faster rise, also in early Q2, while remaining considerably below its pre-pandemic peak. The hiring intentions for the near-term horizon increased in April, especially in trade and services – also probably owing to the lifting of mobility restrictions –, but saw a more modest pick-up in industry, inter alia in the context of the effects and uncertainties generated by the warfare in Ukraine and the sanctions imposed.

Looking at the financial market, the main interbank money market rates have continued to rise at a relatively fast pace in the recent period, prompted by the monetary policy rate hike in April, as well as amid the central bank’s firm control over market liquidity and the expectations on a further increase in the key rate. In turn, yields on government securities extended or steepened their upward path, inter alia under the influence of a renewed deterioration of financial investor sentiment vis-à-vis markets in the region, given the war in Ukraine, but also the expectations on a relatively swifter interest rate rise by the Fed. At the same time, the average remuneration of new time deposits rose at a considerably faster tempo in March and during 2022 Q1 overall. At this juncture, the EUR/RON exchange rate remained relatively stable in April as well.

The annual growth rate of credit to the private sector saw its pick-up come to a halt in March, yet at a particularly high level, i.e. 15.7 percent (from 15.8 percent in February), amid the strong increase in lending, especially to non-financial corporations, and with a rising – albeit relatively modest – contribution from government programmes. The share of leu-denominated loans in credit to the private sector widened further, reaching 72.7 percent.

In today’s meeting, the NBR Board examined and approved the May 2022 Inflation Report, which incorporates the most recent data and information available.

The updated forecast shows a renewed considerable worsening of the outlook for inflation, as the projected path of its annual dynamics has seen an additional significant upward revision across the entire horizon, under the strong impact of global supply-side shocks, compounded and protracted by the war in Ukraine and by the sanctions imposed on Russia.

Specifically, the annual inflation rate is expected to accelerate its growth in 2022 Q2 and decline only gradually in the next four quarters, but more steeply thereafter, due to sizeable base effects and amid aggregate demand surplus narrowing to almost zero. As a result, the inflation dynamics will probably climb considerably above the previously-forecasted levels and will fall to one-digit levels no sooner than 2023 H2, remaining above the variation band of the target at the end of the projection horizon.

The determinants of the new inflation outlook are the much higher increases expected for processed food and fuel prices, as well as for natural gas and electricity prices. The inflationary impact of the latter will, however, be substantially cushioned until March 2023 by the capping schemes for households’ energy bill, but will become strongly manifest afterwards, counterbalancing in part and temporarily the opposite influences from base effects and from probable corrections in energy commodity prices.

Uncertainties are, nevertheless, associated with the presumed impact, but also the duration of energy price capping schemes extended until March 2023, while notable risks continue to come from developments in commodity prices, particularly of agri-food and energy, as well as from the worsening/persistence of bottlenecks in production and supply chains, amid the war in Ukraine and the associated sanctions.

At the same time, the war in Ukraine and the sanctions imposed on Russia also compound considerably the uncertainties and risks to the outlook for economic activity, hence to medium-term inflation developments, through the effects potentially exerted, via multiple channels, on consumer purchasing power and confidence, as well as on firms’ activity, profits and investment plans, but also by affecting the European/global economy and the risk perception towards economies in the region, with an unfavourable 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, which is conditional on fulfilling strict milestones and targets for implementing the approved projects.

However, uncertainties and risks are also associated with the fiscal policy stance, given the requirement for further fiscal 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, strongly marked by the war in Ukraine and the sanctions imposed.

Particularly relevant are also the ECB’s and the Fed’s prospective monetary policy stances, as well as the level and pace of increase of key rates by central banks in Czechia, Poland and Hungary.

In the meeting held today, 10 May 2022, based on the currently available data and assessments, as well as in light of the extremely elevated uncertainty, the NBR Board decided to increase the monetary policy rate to 3.75 percent per annum from 3.00 percent per annum as of 11 May 2022. Moreover, it decided to raise the lending (Lombard) facility rate to 4.75 percent per annum from 4.00 percent per annum and the deposit facility rate to 2.75 percent per annum from 2.00 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 is closely monitoring developments in the domestic and international environment and is using 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 12 May 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 20 May 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 6 July 2022.