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The current scenario of the National Bank of Romania (BNR), which is based on the available data and the regulations in force, shows a considerable worsening of the short-term outlook for inflation, under the strong impact of supply-side shocks, mainly of energy prices, with the inflation being expected to climb to a two-figure level in the second quarter of the year, according to a press release of the central bank.
"The current scenario, which is based on the available data and the regulations in force, shows a considerable worsening of the short-term outlook for inflation, under the strong impact of supply-side shocks, mainly of energy prices, as the forecasted path of the annual CPI rate has been again revised markedly upwards over the short-term horizon. Specifically, the annual inflation rate is expected to significantly accelerate its growth in 2022 Q2 and thus rise to a double-digit value, mainly as a result of far higher increases in natural gas and electricity prices, which will be strongly manifest after the withdrawal in April of compensation schemes for household consumers. Moreover, thereafter, the annual inflation rate will decrease probably only gradually, on a much higher-than-previously-forecasted path, but will witness a relatively steep downward adjustment in the first part of next year and return inside the variation band of the target in 2023 Q4, due to sizeable base effects, as well as to far lower values of the aggregate demand surplus foreseen over the forecast horizon and progressively declining as of mid-2022. Under the circumstances, the annual adjusted CORE2 inflation rate will probably continue to increase slightly for a few months, but will subsequently enter a somewhat more pronounced downward path than previously anticipated, before declining below the prior forecast at the end of the projection horizon," reads the said press release, Agerpres.ro informs.
According to the same source, the compensation schemes for electricity and natural gas prices for households, presumed to be applied until March 2022, will entail an uneven path of the annual inflation rate over the short-time horizon. Thus, it is anticipated to decline very mildly January through March, before witnessing a significant leap in April, once prices return to contractual levels.
"The features of the support schemes are however uncertain, with a possible change in their duration and/or content being likely to affect markedly both the level and the future path of the annual inflation rate, especially in the short term. Moreover, significant uncertainties are still associated with how the impact of these schemes is assessed and included in the CPI calculation, and notable risks continue to come from developments in commodity prices, particularly of energy and agri-food, also amid the Russia-Ukraine geopolitical situation, as well as from persistent bottlenecks in production and supply chains," says BNR.
BNR mentions that uncertainties continue to stem from the evolution of the pandemic as well, given the still-ascending phase of the current wave, triggered by the more contagious Omicron variant of the coronavirus, yet less virulent, implying a lower and abating severity of related restrictions, including in many European countries. Furthermore, a major source of uncertainties and risks remains the absorption of EU funds - especially those under the Next Generation EU programme - that is conditional on fulfilling strict milestones and targets for implementing the approved projects. At the same time, uncertainties and risks are also associated with the fiscal policy stance, given the coordinates of this year's budget programme, aiming at the progress in fiscal consolidation in line with commitments under the excessive deficit procedure, yet in a challenging economic and social environment domestically and globally.
"In the meeting held today, 9 February 2022, based on the currently available data and assessments, as well as in light of the elevated uncertainty, the BNR Board decided to increase the monetary policy rate to 2.50 percent per annum from 2.00 percent per annum as of 10 February 2022. Moreover, it decided to raise the lending (Lombard) facility rate to 3.50 percent per annum from 3.00 percent per annum and the deposit facility rate to 1.50 percent per annum from 1.00 percent per annum, as well as to maintain firm control over money market liquidity. Furthermore, the BNR Board decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions. The BNR Board decisions aim to anchor inflation expectations over the medium term, as well as to foster saving through higher bank rates, so as to bring back the annual inflation rate in line with the 2.5 percent ą1 percentage point flat target on a lasting basis, in a manner conducive to achieving sustainable economic growth in the context of the fiscal consolidation process," explains the same source.
The central bank closely monitors developments in the domestic and international environment and stands ready 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 published on 11 February 2022. The account (minutes) of discussions underlying the adoption of the monetary policy decision during today's meeting will be posted on the BNR's website on 21 February 2022. The next monetary policy meeting of the BNR Board will be held on 5 April 2022.
