Bucharest, July 5, 2023 – The annual inflation rate saw a faster decline in the first two months of Q2, falling from 14.53 percent in March to 10.64 percent in May, in line with the forecasts, mainly as a result of the stronger downward trend in energy and fuel price dynamics, under the impact of some base effects, lower crude oil prices and capping schemes for electricity and natural gas prices.
At the same time, the annual adjusted CORE2 inflation rate continued to decrease gradually during this period, in line with expectations, and reached 13.6 percent in May from 14.6 percent in March amid stronger disinflationary base effects, falling prices of commodities, primarily agri-food items, as well as the downward adjustment of short-term inflation expectations. The impact of these factors surpassed the opposite influences that continued to come from the gradual pass-through of increased costs of firms, including wage costs, into consumer prices, as well as from the preserved profit margins, in the context of a still robust consumer demand.
The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 9.6 percent in May from 12.1 percent in March 2023. Furthermore, the average annual CPI inflation rate and the average HICP inflation rate went down to 14.7 percent and 12.8 percent respectively in May from 15.3 percent and 13.2 percent respectively in March, remaining below the levels prevailing in the region and the Baltic countries.
Economic growth saw a faster-than-expected slowdown in 2023 Q1, to 0.1 percent from 1.0 percent in the previous three months (quarterly change), which makes it likely for excess aggregate demand to narrow somewhat more visibly over this period, compared to expectations.
At the same time, in 2023 Q1 the annual growth rate of GDP shrank faster than forecasted to 2.3 percent from 4.5 percent in 2022 Q4. Behind this decline stood mainly the change in inventories, while the annual rates of increase of household consumption and gross fixed capital formation continued to step up and the contractionary impact of net exports posted a relatively modest widening, as the slowdown in the dynamics of the export volume slightly outpaced that in the dynamics of the import volume of goods and services. Trade deficit and current account deficit recorded, however, significant decreases in 2023 Q1 versus 2022 Q1 mainly amid the improved terms of trade.
Looking at the labour market, recent data show a reacceleration of the increase in the number of employees economy-wide in March-April, as well as a relative stability of the ILO unemployment rate in April-May, after its decline to 5.5 percent in Q1, alongside a steeper upward trend in early Q2 in the particularly high annual dynamics of unit labour costs in industry. At the same time, the surveys indicate a swifter rise in employment intentions in the near future, but also a stronger decline in April-June in the labour shortage reported by companies.
According to current assessments, the annual inflation rate will continue to fall over the following months, in line with the latest medium-term forecast (May 2023), primarily under the influence of base effects and the downward corrections of some commodity prices in previous quarters.
In the meeting held today, 5 July 2023, based on the currently available data and assessments, as well as in light of the very elevated uncertainty, the NBR 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 NBR Board decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.