National Bank: Inflation to Decrease, but Slower


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In March, Romania had an inflation calculated according to the European methodology, based on the harmonized index of consumer prices, of 6.7% – the highest in the EU, much higher than that of Croatia (second place, with 4.9% inflation) , according to the Minutes of the monetary policy meeting of the National Bank of Romania Board on 4 April 2024.

During the meeting, the Board discussed and adopted the monetary policy decision, based on the data and analyses on current and future macroeconomic, financial and monetary developments submitted by the specialised departments, as well as on other available domestic and external information.

Reviewing recent inflation developments, Board members highlighted that the annual inflation rate rose in January 2024 as forecasted, reaching 7.41 percent, but declined to 7.23 percent in February, surpassing December 2023’s 6.61 percent level. The increase from the end of 2023 was primarily attributed to supply-side factors, notably a sharp rise in electricity prices driven by base effects and increases in fuel and tobacco prices due to excise duty hikes and higher-than-expected crude oil prices.

Meanwhile, it was observed that the annual adjusted CORE2 inflation rate continued to decrease from January to February 2024, albeit at a slower rate than in the previous two quarters. It fell to 7.6 percent in February 2024 from 8.4 percent in December 2023, reflecting varying trends in the price dynamics of its three sub-components: a significant slowdown in processed food prices, nearly stagnant market services prices, and a slight acceleration in the non-food segment.

In this context, Board members observed the various factors that influenced core inflation dynamics in the first two months of the year. After thorough analysis, they concluded that prevailing, although diminishing, influences continued to include disinflationary base effects, downward adjustments in agri-food commodity prices, temporary capping of mark-ups on basic food products, and the increasingly noticeable impact of declining import prices. Additionally, fiscal measures implemented at the start of 2024, along with higher short-term inflation expectations and recent wage cost increases passed through partially into prices of certain goods and services, particularly amid a resurgence in private consumption.

Regarding the economic cycle, Board members observed a more pronounced weakening of economic activity in Q4 2023 than initially anticipated, with a 0.5 percent contraction compared to the previous quarter’s 1.0 percent growth. This suggested a more noticeable narrowing of excess aggregate demand during that period than forecasted in February 2024.

Conversely, annual GDP growth increased to 3.0 percent in Q4 2023 from 1.9 percent in the previous quarter. While gross fixed capital formation remained a primary contributor to annual economic growth, its impact was slightly reduced. Household consumption made a significantly larger contribution compared to the previous quarter. However, net exports saw a sharp contraction in Q4 2023 due to a rebound in imports, leading to an increase in both the trade deficit and the current account deficit after three quarters of decline. This was particularly amplified by significant changes in reinvested earnings and distributed dividends.

Overall, deficits narrowed visibly in 2023 compared to 2022, with the current account deficit-to-GDP ratio decreasing from 9.2 percent to 7.0 percent. Despite a notable slowdown in economic growth to 2.1 percent from 4.1 percent the previous year, the economy remained relatively robust, especially within the European and regional context. Gross fixed capital formation emerged as the primary driver of economic growth in 2023, significantly outpacing private consumption, while the negative contribution of net exports neutralized.

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