By rbj
In its meeting of 6 July 2022, the Board of the National Bank of Romania decided:
-to increase the monetary policy rate to 4.75 percent per annum, from 3.75 percent per annum, as of 7 July 2022;
-to raise the lending (Lombard) facility rate to 5.75 percent per annum from 4.75 percent per annum and the deposit facility rate to 3.75 percent per annum from 2.75 percent per annum, as of 7 July 2022;
-to maintain firm control over money market liquidity;
-to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
We present, below, a summary of the Central Bank regarding the context in which the decisions to increase the key interest rate were taken:
The annual inflation rate increased faster than expected in the first two months of 2022 Q2, jumping in April to 13.76 percent from 10.15 percent in March and rising moderately in May to 14.49 percent. Most of the increase came again from exogenous CPI components, especially from the hefty and larger-than-anticipated hikes in electricity and natural gas prices – given the changes made to the price capping schemes in April – and, to a small extent, from the pick-up in fuel prices, following the advance in crude oil prices amid the war in Ukraine and the related sanctions.
The annual adjusted CORE2 inflation rate rose more steeply in the first month of Q2, also compared to forecasts, with its upward trend however softening subsequently, and reached 9.1 percent in May, from 7.1 percent in March, particularly under the influence of new significant increases in processed food prices. Specifically, the evolution of this component continues to reflect the effects of the surges in commodity prices, mainly agri-food prices, and of elevated energy and transport costs, alongside the influences of production chain bottlenecks, compounded by high short-term inflation expectations, the resilience of demand in certain segments, as well as by the significant share of food items and imported goods in the CPI basket.
Therefore, the step-up in annual inflation rate in the first months of Q2 was further driven by global supply-side shocks, amplified by the war in Ukraine and the sanctions imposed, which triggered and fuelled the strong rise in inflation worldwide, to unprecedented levels over the last decades in developed economies, including in many European countries.
Average annual CPI inflation rate and average annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went up to 8.3 percent and 7.1 percent respectively in May, from 6.5 percent and 5.6 percent respectively in March 2022.
Economic activity stepped up in 2022 Q1 at a stronger-than-foreseen pace, adding 5.2 percent against 2021 Q4, when it grew by 1.0 percent quarter on quarter. This renders likely a visibly higher-than-expected resurgence in positive output gap in this period, albeit relatively moderate.
In 2022 Q1, annual GDP dynamics advanced to 6.5 percent from 2.4 percent in 2021 Q4, significantly above expectations. However, behind the strengthening in GDP growth rate stood mainly the change in inventories, while the contribution of private consumption – coming second in terms of size – owed to some sub-components other than purchases of goods and services, which reported a markedly lower increase in annual terms during this quarter, inter alia amid a base effect. A notable contribution was also made by gross fixed capital formation, as a result of the strong re-acceleration against the same year-earlier period of both net investment in equipment (transport equipment included) and new construction works.
At the same time, during this quarter, net exports no longer made a negative contribution to annual GDP dynamics, as the increase in the annual change in the export volume of goods and services outpaced that in the import volume. However, the annual increase in the negative trade balance re-accelerated, primarily amid the relatively more unfavourable developments in import prices, while the current account deficit saw a considerably faster deepening trend against the same period of the previous year, inter alia as a result of the strong worsening in the dynamics of the primary income balance, on account of outflows of reinvested earnings and distributed dividends.
The recent developments in high-frequency indicators point to a quasi-standstill of economic activity in Q2, under the impact of the war in Ukraine and the associated sanctions, which implies a marked decline in the annual GDP growth rate during this period.
Thus, the data for April 2022 show a deceleration in the annual growth of retail trade and motor vehicle and motorcycle trade, as well as a larger contraction in annual terms in the industrial output, concurrently with the notable slowdown in the dynamics of new manufacturing orders. Moreover, in April, the volume of construction works recorded a significant drop from the same year-earlier period, mainly owing to developments in the residential and non-residential segments, but also following the steeper fall in civil engineering works.
