In its meeting of 9 February 2023, the Board of the National Bank of Romania decided:
- to keep the monetary policy rate at 7.00 percent per annum;
- 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;
- 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 went down to 16.37 percent in December 2022 from 16.76 percent in November, remaining only marginally above the forecast, mainly as a result of lower fuel prices amid the decline in oil prices and the appreciation of the leu against the US dollar.
Consequently, in 2022 Q4, the annual inflation rate reached a plateau, in line with expectations, posting a much more subdued rise over the period than in the previous quarters (from 15.88 percent in September), given the stronger disinflationary impact from the aggregate dynamics of the exogenous CPI components, following the notable decline in fuel prices.
The annual adjusted CORE2 inflation rate saw a renewed, slight acceleration over the last months of 2022, contrary to forecasts, rising from 11.9 percent in September to 14.6 percent in December 2022, against the background of the continued advance in processed food prices, but also of almost across-the-board price increases in non-food and services 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.
The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) moved up to 14.1 percent in December 2022 from 13.4 percent in September. Furthermore, the average annual CPI inflation rate and the average HICP inflation rate went up to 13.8 percent and 12.0 percent respectively in December 2022 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.
The new statistical data reconfirm the significantly stronger-than-expected economic growth in 2022 Q3, at a pace similar to that in the previous three months, i.e. 1.2 percent, implying a pick-up in the aggregate demand surplus during this period too.
Annual GDP growth continued to decelerate in 2022 Q3 – to 3.8 percent from 5.1 percent in Q2 –, although remaining significant from a historical perspective, mainly on the back of gross fixed capital formation this time round, way ahead of the contribution from household consumption. By contrast, the contribution of net exports strongly re-entered negative territory in Q3, 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, inter alia as a result of the strong worsening in the dynamics of the primary income balance.
The latest data and analyses point to a gradual slowdown in economic growth in 2022 Q4 and 2023 Q1, under the impact of the protracted war in Ukraine and the extension of the associated sanctions, but also a mild advance in GDP growth in 2022 Q4 compared to the same period of 2021 amid a base effect.
Relevant from this perspective is the acceleration seen in October-November 2022 by the growth rate of retail trade and motor vehicles and motorcycles sales, but especially by that of services to households, alongside the further strong step-up in the volume of construction works. In the first two months of 2022 Q4, industrial output saw, however, its contraction in annual terms re-widen, whereas exports of goods and services recorded a considerable drop in their annual change, much more pronounced than that of imports, inter alia in the context of the deteriorating terms of trade, which triggered an acceleration in the annual increase in trade and current account deficits. Yet, the dynamics of the latter reflected also the influences of rising inflows of EU funds to the current account, largely offset however by a worsening of developments in the primary income segment.
The number of employees in the economy continued to rise in the first two months of 2022 Q4, yet at a visibly slower pace than in H1, while the ILO unemployment rate climbed again to reach 5.6 percent in December from 5.4 percent in Q3. At the same time, the labour shortage reported by companies remained, in early 2023 too, on the gradual downward trend visible in 2022 H2, while the revival of hiring intentions in January 2023 occurred after the visible drop seen at the end of last year and in the context of mixed sectoral developments.
The main interbank money market rates saw their gradual downward adjustment extend into January 2023, amid the excess liquidity in the banking system. Yields on government securities posted new declines – relatively in line with developments in the region –, in the context of the marked improvement of investor sentiment towards financial markets in emerging economies, under the influence of expectations on a more moderate tightening of monetary policy by the Fed.
Against this background, reflecting also an increase in the relative attractiveness of investments in domestic currency, the leu exhibited again a strengthening trend versus the euro starting in mid-January 2023. Moreover, the domestic currency appreciated further against the US dollar following the developments on international financial markets.
The annual growth rate of credit to the private sector decelerated in December 2022 as well, albeit more moderately, reaching 12.1 percent (13.2 percent in November), amid the slightly slower decline in the dynamics of the leu-denominated component, alongside the steeper uptrend in the rate of change of foreign currency loans. The share of leu-denominated loans in credit to the private sector continued to fall, to 68.8 percent in December 2022 from 69.4 percent in November.
In today’s meeting, the NBR Board examined and approved the February 2023 Inflation Report, which incorporates the latest available data and information.
According to the updated forecast, the annual inflation rate is expected to fall at a significantly faster-than-previously anticipated pace until mid-2024, especially as of 2023 Q3, amid 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.
Specifically, the annual inflation rate is envisaged to decline to one-digit levels starting in 2023 Q3 already – almost three quarters earlier than in the prior forecast – and end the year far below the previously-anticipated value. It is then seen falling at a visibly slower pace in 2024 H2 and remaining slightly above the variation band of the target at the end of the projection horizon.
Aside from the new setup of energy price capping schemes, the major drivers behind the prospective decrease in inflation are the increasingly strong disinflationary base effects and the downward corrections of some commodity prices. To these add the influences from the likely contraction and closing of the positive output gap across the forecast horizon, although somewhat slower than in the previous projection, implying that the output gap will enter negative territory only slightly towards end-2024.
The war in Ukraine and the related sanctions continue, however, to generate significant uncertainties and to pose risks to the outlook for economic activity, hence to medium-term inflation developments, mainly through the effects exerted on households’ and investors’ confidence, as well as on their income, but also by affecting the economies of major trading partners and the risk perception towards economies in the region, with an 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.
Particularly important at the current juncture are the Fed’s and the ECB’s monetary policy decisions, as well as the behaviour of central banks in the region, inter alia from the perspective of the constantly evolving interest rate differential and of capital flows.
In the meeting held today, 9 February 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 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 15 February 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 21 February 2023 at 3:00 p.m.
The next monetary policy meeting of the NBR Board will be held on 4 April 2023.