Banca Naţională a României

The annual inflation rate went up in September to 15.88 percent, i.e. above the forecast, from 15.32 percent in August, mainly under the impact of continued hikes in processed food and electricity prices, only partly offset by lower fuel prices, amid declining oil prices.

Thus, the 12-month inflation rate saw an increase in 2022 Q3 too, albeit much more subdued than in the previous quarters (from 15.05 percent in June), in the context of the deceleration in the aggregate dynamics of the exogenous CPI components during this period as a whole, primarily as a result of the drop in fuel prices, inter alia following the motor fuel price compensation.

The annual adjusted CORE2 inflation rate continued to climb at a sustained, faster-than-expected pace in Q3, albeit slower than in the first part of the year, going up to 11.9 percent in September, from 9.8 percent in June, owing almost entirely to the 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 elevated energy and transport costs, alongside the influences of bottlenecks in production chains. These were further compounded in Q3 too by high short-term inflation expectations and the resilience of 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 13.4 percent in September, from 13.0 percent in June. Furthermore, average annual CPI inflation rate and average HICP inflation rate went up to 11.8 percent and 10.2 percent respectively in September, from 9.3 percent and 7.9 percent respectively in June 2022, remaining however below the levels prevailing in the region and the Baltic countries.

The new statistical data reconfirm the significantly stronger-than-expected economic growth in 2022 Q2, albeit considerably slower than in the previous quarter, down to 1.8 percent from 5.3 percent in the first three months of the year, implying a moderate pick-up in the aggregate demand surplus during this period too.

The slight deceleration in annual GDP growth in Q2 is also reconfirmed, to 5.1 percent, from 6.4 percent in Q1, yet amid a change in the structure of aggregate demand. Thus, during this period, the largest contribution to economic growth came from household consumption, with a modest one, albeit on the increase, stemming from gross fixed capital formation, while the contribution of the change in inventories turned negative again. In turn, net exports made a marginally larger expansionary contribution in Q2, given the further positive differential between the dynamics of exports of goods and services, in terms of volume, and those of imports thereof, both of which saw a slight decrease against Q1. Consequently, the fast annual pace of increase of the negative trade balance posted a mild slowing, inter alia in the context of the relative narrowing of the unfavourable differential between the upward change in import prices and that in export prices, while the annual growth of the current account deficit halved compared to the previous quarter’s average, given also the improvement in the evolution of the primary income balance.

The latest data and analyses point to a quasi-standstill of economic activity in 2022 Q3 and Q4, under the impact of the escalating war in Ukraine and the extension of the associated sanctions. Compared to the same year-earlier period, however, GDP will likely see a significant advance in Q3, on account of a base effect, but with a decelerating increase in private consumption.

Relevant from this perspective is the notable slowdown in the annual dynamics, July through August, of retail trade and especially of services to households, counterbalanced only to a small extent by the slight recovery of motor vehicle and motorcycle trade. At the same time, industrial output saw a wider annual contraction in the first two months of Q3 overall, while construction works rebounded strongly against the same year-earlier period, mainly on account of those in the non-residential and civil engineering segments.

However, imports of goods and services saw a significantly faster rise in annual terms in July-August, inter alia against the backdrop of adverse developments in external prices; their pace of increase was stronger than that of exports, which led to a renewed considerable step-up in the annual dynamics of trade deficit compared to the previous quarter’s average, and a somewhat more modest re-acceleration of the annual dynamics of the current account deficit, given the substantial improvement in the primary income balance for the period as a whole. This deterioration in the terms of trade is common to many EU countries amid the energy crisis and the war in Ukraine.

The number of employees in the economy stopped its increase in August, given the cut in the number of personnel in the private sector, while the ILO unemployment rate saw a renewed marginal advance at the end of Q3, after its decrease to 5.1 percent in August. At the same time, at the beginning of Q4, the labour shortage reported by companies remained flat at the lower level reached in the previous months, while hiring intentions for the near-term horizon recovered slightly, but in the context of mixed sectoral developments, probably explained by the very high energy costs, as well as by the uncertainties generated by the war in Ukraine and the related increasingly strict sanctions.

The main interbank money market rates resumed growth in October under the influence of the increase in the monetary policy rate, yet at a slower pace. In turn, yields on government securities advanced more steeply during the first two 10-day periods of the month, before witnessing sizeable downward adjustments, similarly to developments in advanced economies and in the region, amid the improvement in global financial market sentiment and in the risk perception towards the region. Moreover, the average remuneration of new time deposits climbed further in September, albeit more mildly than in July-August, including for households.

Against this background, reflecting also a relatively high attractiveness of investments in domestic currency, the leu posted again an appreciation trend versus the euro in October, only partly and temporarily reversed towards the end of the month. The annual dynamics of credit to the private sector saw its decrease come to a halt in September, staying at 16 percent (15.9 percent in August), as the renewed deceleration in the growth rate of the domestic currency component was counterbalanced by the sharper uptrend in the dynamics of foreign currency-denominated loans. As a result, the share of leu-denominated loans in credit to the private sector fell to 70.6 percent in September from 71.8 percent in August.

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

According to the updated forecast, the annual inflation rate is expected to grow mildly some more towards end-2022 and then to embark on a gradual downward path, which is seen declining to one-digit levels in 2024 H1 and steepening afterwards, although remaining slightly above the variation band of the target at the end of the projection horizon.

The outlook for a reversal in the annual inflation rate path after reaching a plateau in 2022 Q4 relies on the softening impact of global supply-side shocks – inter alia in the context of energy price capping schemes implemented until August 2023 –, as well as on increasingly manifest disinflationary base effects. To these add the influences from the likely contraction and rapid closing of the positive output gap, followed by the output gap widening into negative territory at a relatively faster pace starting in 2023 Q4.

Uncertainties are, nevertheless, associated with the presumed impact, but also the duration of energy and fuel price capping and compensation schemes. At the same time, the supply-side risks to the current inflation outlook are tending to balance overall, amid the recent developments in key energy and agri-food commodity prices, as well the major determinants thereof.

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 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 and by the tightening of economic and financial conditions worldwide.

Major uncertainties and risks are associated, nonetheless, with the fiscal policy stance as well, given the requirement for further budget consolidation amid the excessive deficit procedure and the overall uptrend in the cost of financing, 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 an impact on budget parameters. The characteristics of the upcoming budget revision in 2022 and the coordinates of the 2023 draft budget are important from this perspective.

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

In the meeting held today, 8 November 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 6.75 percent per annum from 6.25 percent per annum as of 9 November 2022. Moreover, it decided to raise the lending (Lombard) facility rate to 7.75 percent per annum from 7.25 percent per annum and the deposit facility rate to 5.75 percent per annum from 5.25 percent, 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 the annual inflation rate back 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 new quarterly Inflation Report will be presented to the public in a press conference on 14 November 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 22 November 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 January 2023.