Banca Naţională a României

The annual inflation rate reached 16.76 percent in November 2022, i.e. above the forecast, after having fallen to 15.32 percent in October from 15.88 percent in September. The increase was driven, during this period too, especially by the hike in food prices, including VFE prices, but also by the stronger advance in the prices of non-food items and market services. Their impact was, however, markedly counterbalanced by the slower fuel price dynamics, amid the downward trend in oil prices, as well as the firewood price cap.

The annual adjusted CORE2 inflation rate posted a slightly faster upward movement in the first two months of 2022 Q4, contrary to forecasts, rising from 11.9 percent in September to 14.0 percent in November 2022, as a result of almost across-the-board price increases in the three core inflation segments. The evolution of adjusted CORE2 inflation continues to reflect the effects of large hikes in agri-food commodity prices and energy and transport costs, alongside the influences of bottlenecks in production chains. These were compounded, during this period 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 14.6 percent in November from 13.4 percent in September. Furthermore, average annual CPI inflation rate and average HICP inflation rate went up to 13.1 percent and 11.4 percent respectively in November from 11.8 percent and 10.2 percent respectively in September 2022, remaining however below the levels prevailing in the region and the Baltic countries.

Economic activity increased in 2022 Q3 by 1.3 percent compared to the previous three months, the same as in Q2, thus significantly exceeding the forecasts, which makes it likely for excess aggregate demand to pick up again over this period, contrary to expectations.

By contrast, compared to the same year-earlier period, GDP growth continued to decelerate in 2022 Q3 – to 4.0 percent from 5.1 percent in Q2 – remaining, however, significant from a historical perspective. The economic growth was supported, this time round, mainly by gross fixed capital formation and only to a secondary extent by household consumption, while the contribution of net exports strongly re-entered negative territory, given that the annual growth rate of imports of goods and services exceeded notably that of exports thereof in terms of volume.

Against this background, the growth rate of the trade deficit accelerated considerably versus the same year-earlier period, despite the narrowing of the unfavourable differential between the lower annual change in import prices and that in export prices, whereas the annual dynamics of the current account deficit doubled.

The latest data and analyses point to a significant slowdown in economic growth in 2022 Q4 versus Q3, under the impact of the protracted war in Ukraine and the extension of the associated sanctions, implying nevertheless a robust GDP growth compared to the same period of 2021 amid a base effect.

Relevant from this perspective is the acceleration seen in October by the annual growth of retail trade and motor vehicles and motorcycles sales, but especially by that of services to households. At the same time, the volume of construction works posted a markedly faster expansion in the first month of 2022 Q4, while industrial production continued to report a lower contraction in annual terms. However, exports recorded a considerable drop in their annual change, much more pronounced than that of imports of goods and services, inter alia in the context of the unfavourable evolution of external prices, which triggered an acceleration in the annual increase in trade and current account deficits.

The number of employees in the economy saw further rises in September-October 2022, yet notably lower than in H1, while the ILO unemployment rate advanced very slightly in October-November, after its decrease to 5.4 percent in Q3. Furthermore, the hiring intentions for the near-term horizon declined again in December 2022, after a visible recovery in the previous two months, whereas the labour shortage reported by companies remained stuck in 2022 Q4 to the lower level reached in the previous period.

The main interbank money market rates witnessed gradual downward adjustments November through December 2022, amid the easing of liquidity conditions, while yields on government securities declined more steeply, inter alia under the influence of the improvement in global financial market sentiment and in the risk perception towards financial markets in the region. The average lending rate on new business and the average remuneration of new time deposits in the case of households continued, however, to climb in October and November 2022.

Against this background, reflecting also an increase in the relative attractiveness of investments in domestic currency, the leu posted an appreciation trend versus the euro during the last two months of 2022 as well. Moreover, the domestic currency strengthened significantly against the US dollar following the developments on international financial markets.

The annual dynamics of credit to the private sector saw a sharper decrease in the first two months of 2022 Q4, reaching 13.2 percent in November (16.0 percent in September), amid the slower growth of the leu-denominated component, counterbalanced however slightly by the further uptrend in the high dynamics of foreign currency loans. As a result, the share of leu-denominated loans in credit to the private sector continued to fall slowly, to 69.4 percent in November from 70.6 percent in September.

According to current assessments, the annual inflation rate will probably decline in 2023 Q1 in line with the latest medium-term forecast (November 2022), but will fall at a significantly faster pace afterwards, to reach one-digit levels in 2023 Q3 already. This is due to the extension of energy price capping and compensation schemes until 31 March 2025, concurrently with the changes made to these schemes starting 1 January 2023.

In the near run, the main drivers behind the decrease in the annual inflation dynamics will however be the disinflationary base effects associated with the sizeable hikes recorded previously by energy and fuel prices, as well as the relatively steeper downtrend of oil prices in recent months.

The balance of supply-side risks to the new inflation outlook is in relative equilibrium, given the recent developments in key energy and agri-food commodity prices, as well as those in their major determinants.

The war in Ukraine and the related sanctions further 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 projects. However, it 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 war in Ukraine and by the tightening of economic and financial conditions worldwide.

Significant uncertainties and risks are, however, associated with the fiscal policy stance as well, given, on one hand, the public deficit target set for 2023 in order to continue budget consolidation amid the excessive deficit procedure and the hefty increase in financing cost and, on the other hand, the packages of support measures to be implemented or extended this year, in a still challenging economic and social environment domestically and globally, 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, 10 January 2023, 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 7.00 percent per annum from 6.75 percent per annum as of 11 January 2023. Moreover, it decided to raise the lending (Lombard) facility rate to 8.00 percent per annum from 7.75 percent per annum and the deposit facility rate to 6.00 percent per annum from 5.75 percent. 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, the 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 23 January 2023 at 3:00 p.m.

In line with the announced calendar, the next monetary policy meeting of the NBR Board will be held on 9 February 2023.