BNR warns: High inflation, increasing risks of fiscal policy and of exchange rate

Inflation will remain high for a while, the risks to the leu exchange rate may increase, the risks to fiscal policy are growing, and some companies may have to restructure. Also, “notable” uncertainties arise from the expansion of automation and digitization internally, shows the minutes of the monetary policy meeting of the National Bank of Romania Board on 6 July 2022.

“Looking at the recent developments in inflation, Board members showed that the annual inflation rate had increased faster than expected in the first two months of 2022 Q2 amid a high jump in April to 13.76 percent from 10.15 percent in March, followed by a moderate advance in May to 14.49 percent. It was noted that most of the increase had been yet again triggered by exogenous CPI components, especially by the hefty and larger-than-anticipated hikes in electricity and natural gas prices, given the changes made to the price capping schemes starting in April. Higher-than-expected, yet modest influences had stemmed from a further pick-up in fuel prices, under the impact of the steep rise in crude oil prices, in the context of the war in Ukraine and the associated sanctions, as well as from the higher prices of some public utilities, reflecting the surge in energy prices,” says the minutes.

In turn, the annual adjusted CORE2 inflation rate had risen more steeply in the first month of Q2, also compared to forecasts, with its upward trend however softening subsequently, and had reached 9.1 percent in May from 7.1 percent in March. Board members noted that the advance had continued to be mainly driven by processed food prices, to an even significantly higher extent compared to the previous quarter, which had thus touched a record high. By contrast, the contribution from the services sub-component had dropped to the lowest level in 12 months – probably reflecting inter alia the evolution in annual terms of the EUR/RON exchange rate –, while the contribution of the non-food sub-component had also contracted, albeit more moderately, given that the range of items having posted a slower increase in the annual change had exceeded that of goods whose pick-up in price dynamics had seen a mild acceleration.

At the same time, they emphasised the notably swifter growth rates seen in March-April by producer prices in manufacturing, including the consumer goods segment – under the influence of higher costs of energy and other commodities, especially agri-food items, as well as amid persistent bottlenecks in production and supply chains –, likely to continue to pass through gradually into the prices of some consumer goods and services, but also depending on demand conditions. Members also stressed the economic agents’ high or rising short-term inflation expectations over the last months, accompanied by a yet significantly less visible adjustment in financial analysts’ longer-term inflation expectations, as well as the erosion trend of the consumer purchasing power, reflected in the dynamics of the average real net wage re-entering negative territory at the beginning of Q2.

The annual economic growth rate had also seen a significantly stronger-than-anticipated increase in 2022 Q1 to 6.4 percent, after the large declines in the second half of 2021 to 2.4 percent in 2021 Q4. However, behind the strengthening in GDP growth rate had stood mainly the change in inventories, while the contribution of private consumption – coming second in terms of size – had owed to some sub-components playing a secondary part and accounting for a relatively low share, whereas purchases of goods and services had posted a considerably slower annual pace of increase during that period, inter alia amid a base effect, Board members noted.

More details here.

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