Food prices will approach 12% in the first quarter of the year, according to the Inflation Report, published on Friday by the National Bank. Inflationary pressures on the energy segment will also continue (including in the case of fuels, given the evolution of global crude oil prices). From April, after the end of the period of application of the support measures provided for in the legislation, the forecast is burdened with major uncertainties (related to energy prices).
In the NBR Board meeting of 10 January 2022, the latest assessments revealed the outlook for the annual inflation rate to pick up gradually over the coming months under the impact of supply-side shocks, exceeding the values shown over this time horizon by the previous forecast. Behind the worsening of the short-term inflation outlook stood the expected higher increases in electricity and natural gas prices – even amid the implementation of measures to compensate and cap such hikes – as well as in processed food prices, mainly due to the advance in energy and agri-food commodity prices. Their impact was likely to amplify and further prolong the positive deviation of the annual inflation rate from the upper bound of the variation band of the target, especially after the measures to compensate and cap energy price increases ceased, but also to trigger disinflationary base effects over the longer time horizon.
Based on the data available at that time and in the context of the identified risks and uncertainties, the NBR Board decided to increase the monetary policy rate to 2 percent per annum and to maintain firm control over money market liquidity. Furthermore, the Board decided to extend the symmetric corridor of interest rates on standing facilities around the policy rate to the standard width of ±1 percentage point, by
raising the lending facility rate to 3.00 percent and keeping the deposit facility rate at 1.00 percent. In addition, the NBR Board underlined its aim to bring back and maintain the annual inflation rate in line with the 2.5 percent ±1 percentage point flat target, inter alia via the anchoring of inflation expectations over the longer time horizon, in a manner conducive to achieving sustainable economic growth in the
context of the fiscal consolidation process, while safeguarding financial stability. Furthermore, the NBR Board stated that it stood ready to use its available instruments in order to achieve the overriding objective regarding medium-term price stability.
Since the release of the November 2021 Inflation Report, a number of risks have continued to materialise, stemming mainly from increases in energy and other commodity prices. Nevertheless, multiple interlinked sources of uncertainty have persisted, of which those associated with public health – amid the new pandemic wave – and energy market strains have gained renewed momentum of late.
Against this background, the support that the authorities have provided to households via price caps and compensation of bills will imply lower annual CPI inflation rates for the months when these measures are in place. After the expiry of these schemes, as from April and further into the year, prices paid by household consumers will gradually reflect, depending on the renewal dates of their contracts,
the higher levels in energy markets, which still remain relatively tight in the short term. Specifically, the forecast shows a higher annual CPI inflation rate in April, ahead of a gradual deceleration over the next quarters, when lower adjustments in energy prices are envisaged. In this environment, the path of the annual inflation rate in the new baseline scenario has again been substantially revised upwards. Large and persistent hikes in energy commodity prices pose relevant risks to economic activity as well.
Even though the high-frequency indicators point to a further expansion of the economy in 2021 Q4 and 2022 Q1, there are signs of a slowdown. For these reasons, until the medical situation and energy market developments return to normality, downside risks to economic activity and upside risks to price dynamics are seen prevailing further. Moreover, should such woes persist, this would weigh on the trajectory of macroeconomic variables over a longer horizon.
Economic activity was directly hit by both the peaks reached last October by the infections with the Delta variant of the coronavirus, the mild alleviation in the latter half of 2021 Q4 notwithstanding, and the very fast spread of Omicron variant early this year. As a result, the bottlenecks in global production and supply chains persisted and, in the case of Romania, health vulnerabilities heightened, induced by a still
extremely low vaccination rate, all compounded by the delay in the normalisation of energy markets. Under the circumstances, annual GDP dynamics were revised downwards for both 2021 and 2022. While household consumption will further make the largest contribution to economic growth, the outlook points to a stronger slowdown in consumer demand growth in 2021 Q4 and 2022 Q1, as a result of energy
price hikes which reduce households’ real disposable income. These developments could be moderated by the increase in the pension point and the minimum wage at the turn of the year, as well as by the implementation of social measures targeting parts of households with a stronger propensity for consumption. Over the medium term, the economic recovery, accompanied by a more substantial revival of labour
market, could strengthen consumption growth.
The central banks says that the annual CPI inflation rate is projected at 9.6 percent in December 2022, peaking in April, once the support schemes for household users of electricity and natural gas have expired, according to the legal provisions in force on the publication date of this Report. Electricity and natural gas price hikes, yet of significantly lower magnitudes, are also expected for July and October 2022 respectively, when consumers renew their contracts with suppliers. Thus, the path of inflation will remain high until the end of 2023 Q3, before re-entering the variation band of the target a quarter later; at end-2023, the measure is envisaged to run at 3.2 percent. Compared to the previous Inflation Report, the new forecast stands 3.7 percentage points higher for December 2022, of which 3.5 percentage points are ascribed to energy prices, which are beyond the scope of monetary policy.