NBR: Annual CPI inflation rate down to 2.58 in June

In 2020 Q2, the annual CPI inflation rate followed the downward trend visible since early this year and neared in June the mid-point of the variation band of the flat target, standing at 2.58 percent compared to 3.05 percent in March, reads the Inflation Report-August 2020 released today by the National Bank of Romania.

The disinflationary trend owed mainly to the large fall in fuel prices given the plummeting international oil prices induced by the strong contraction of aggregate demand amid the health crisis and the uncertainties about the trajectory of the global economic recovery. At the same time, however, the simultaneous occurrence of demand- and supply-side shocks, arising from the measures taken to flatten the epidemic curve, put the annual adjusted CORE2 inflation rate on a relatively stable course, coming in at 3.7 percent at quarter-end. Under the impact of these developments, in June, the annual CPI dynamics stood 0.1 percentage points below the latest macroeconomic projection (in the May 2020 Inflation Report). Moreover, in the course of Q2, the average annual HICP inflation rate continued to count among the highest across the EU Member States, closing, however, part of the gap with the EU average.
Contrary to forecasts, the annual adjusted CORE2 inflation rate continued to post fast dynamics in 2020 Q2 too, running only 0.1 percentage points below the March level. On the demand side, the slowing wage growth and households’ more cautious behaviour, in view of the uncertainties about the future economic situation, caused the output gap to fall deeply into negative territory in Q2. The influence of demand conditions was counterbalanced by the health crisis-specific supply-side developments: the closure of shopping centres, the contraction of activity (by reducing the number of employees), alongside additional costs generated by the adoption of protective measures.”Looking ahead, it is difficult to anticipate how persistent each of the two categories of shocks will be, while in the short run, at end-Q2, the annual core inflation rate exceeded significantly the previously-projected value (+0.3 percentage points) as a result of underestimating the magnitude of the supply shock to economic agents,” NBR says.
In 2020 Q1, the annual growth rate of unit labour costs economy-wide came in at 6.7 percent, running above the previous quarter’s 5.8 percent reading. Given that the COVID-19 pandemic effects are seen to fully become manifest in Q2, unit labour costs are estimated to jump significantly during this period, following a much larger decline in economic activity than the adjustment on the labour market – this behaviour was prevalent during the past recession and will probably be a feature of the present crisis as well, considering the broad government support for retaining employees through furlough schemes. The data available for the industrial sector show the annual growth rate of unit wage costs picking up markedly in April and decreasing mildly in May (45.3 percent and 33 percent respectively, against an average of about 13 percent in the last four quarters). Leaving aside the impact of firms’ recourse to furlough schemes, the change in unit wage costs is similar in terms of magnitude to that seen during the previous recession.

According to preliminary data, economic growth slowed down visibly in 2020 Q1 to 2.4 percent from 4.3 percent in the previous quarter, in spite of remaining particularly robust in the first two months of the year. At the same time, the trade deficit posted a markedly faster widening amid a steeper decline in exports than in imports of goods and services. Consequently, the dynamics of the current account deficit regained momentum, the improvement in the primary and secondary income balances notwithstanding.

Financial market conditions improved after the adoption of the monetary policy decisions and after the end-March peak in tensions generated by the COVID-19 crisis. Key interbank money market rates witnessed a significant downward adjustment in the closing 10-day period of March and afterwards continued to decline gradually, while yields on leu-denominated government securities went down progressively, amid the increased volume of liquidity injected by the NBR through bilateral repo operations and through purchases of leu-denominated government securities on the secondary market. At the same time, the EUR/RON exchange rate saw lower fluctuations, moving in a narrow range, inter alia amid an improvement in global financial market sentiment.