The National Bank of Romania (BNR) expects the annual inflation rate to fall at a significantly faster-than-previously anticipated pace until mid-2024, especially as of 2023 Q3, amid the extension of energy price capping and compensation schemes until 31 March 2025, concurrently with the changes made to these schemes starting 1 January 2023, according to Agerpres.

„The annual inflation rate is expected to fall at a significantly faster-than-previously anticipated pace until mid-2024, especially as of 2023 Q3, amid the extension of energy price capping and compensation schemes until 31 March 2025, concurrently with the changes made to these schemes starting 1 January 2023. Thus, the annual inflation rate is envisaged to decline to one-digit levels starting in 2023 Q3 already – almost three quarters earlier than in the prior forecast – and end the year far below the previously-anticipated value. It is then seen falling at a visibly slower pace in 2024 H2 and remaining slightly above the variation band of the target at the end of the projection horizon,” the BNR said in a release sent to Agerpres on Thursday.

Aside from the new setup of energy price capping schemes, the major drivers behind the prospective decrease in inflation are the increasingly strong disinflationary base effects and the downward corrections of some commodity prices. To these add the influences from the likely contraction and closing of the positive output gap across the forecast horizon, although somewhat slower than in the previous projection, implying that the output gap will enter negative territory only slightly towards end-2024.

The war in Ukraine and the related sanctions continue, however, to generate significant uncertainties and to pose risks to the outlook for economic activity, hence to medium-term inflation developments, mainly through the effects exerted on households’ and investors’ confidence, as well as on their income, but also by affecting the economies of major trading partners and the risk perception towards economies in the region, with an impact on financing costs.

Furthermore, the absorption of EU funds, especially those under the Next Generation EU programme, is conditional on fulfilling strict milestones and targets for implementing the projects. However, it is essential for carrying out the necessary structural reforms, energy transition included, as well as for counterbalancing, at least in part, the contractionary impact of supply-side shocks, compounded by the war in Ukraine and by the tightening of economic and financial conditions worldwide.

The central bank mentions that significant uncertainties and risks are, however, associated with the fiscal policy stance as well, given, on one hand, the public deficit target set for 2023 in order to continue budget consolidation amid the excessive deficit procedure and the hefty increase in financing cost and, on the other hand, the packages of support measures to be implemented or extended this year, in a still challenging economic and social environment domestically and globally, with potential adverse implications for budget parameters.

According to the BNR, particularly important at the current juncture are the Fed’s and the ECB’s monetary policy decisions, as well as the behaviour of central banks in the region, inter alia from the perspective of the constantly evolving interest rate differential and of capital flows.

In the meeting held today, 9 February 2023, based on the currently available data and assessments, as well as in light of the very elevated uncertainty, the BNR Board decided to keep the monetary policy rate at 7.00 percent per annum. Moreover, it decided to leave unchanged the lending (Lombard) facility rate at 8.00 percent per annum and the deposit facility rate at 6.00 percent per annum. 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 bring the annual inflation rate back in line with the 2.5 percent plus/minus 1 percentage point flat target on a lasting basis, inter alia by anchoring inflation expectations over the medium term, in a manner conducive to achieving sustainable economic growth. At the current juncture, the balanced macroeconomic policy mix and the implementation of structural reforms inter alia by using EU funds to foster the growth potential over the long term are of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand adverse developments.

The BNR mentions that it closely monitors developments in the domestic and international environment and will continue 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 presented to the public in a press conference on 15 February 2023.

The next monetary policy meeting of the BNR Board will be held on 4 April 2023.

Agerpres