Bucharest, August 7, 2023 – The annual inflation rate went down in June to 10.25 percent – in line with forecasts –, from 10.64 percent in May, amid the faster annual decline in fuel prices and the slower growth in processed food prices.
In 2023 Q2 as a whole, the annual inflation rate saw, as expected, a considerably faster drop, down by 4.28 percentage points (from 14.53 percent in March). The decline was driven, in this period as well, mainly by energy and fuel price dynamics, which followed a steeper downtrend, under the impact of base effects, developments in crude oil prices and capping schemes for electricity and natural gas prices.
The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 9.3 percent in June from 12.1 percent in March 2023. Furthermore, the average annual CPI inflation rate and the average HICP inflation rate fell to 14.2 percent and 12.5 percent respectively in June from 15.3 percent and 13.2 percent respectively in March, remaining below the levels prevailing in the region and the Baltic countries.
The new statistical data reconfirm the slowdown in economic growth in 2023 Q1 to 0.2 percent from 1.0 percent in the previous three months (quarterly change), which implies a relatively pronounced narrowing of excess aggregate demand over this period.
At the same time, in 2023 Q1 the annual growth rate of GDP shrank significantly to 2.4 percent from 4.5 percent in 2022 Q4. According to the new data, the decrease was driven by the change in inventories, while the annual rate of increase of household consumption posted a more visible step-up and the dynamics of gross fixed capital formation saw only a mild decrease, remaining at a double-digit level. Moreover, the impact of net exports became expansionary again, given the widening of the positive differential between the dynamics of exports of goods and services, in terms of volume, and those of imports, which continued to drop at a faster tempo. Against this background, trade deficit and current account deficit recorded substantial decreases in 2023 Q1 versus 2022 Q1, owing inter alia to the improved terms of trade.
The latest data and analyses point to subdued, and more moderate than previously anticipated, economic growth in 2023 Q2 and Q3, implying further relatively low annual GDP dynamics.
The local currency posted a strengthening trend vis-à-vis the euro for most of July, inter alia under the influence of one-off or seasonal domestic factors, after having softened mildly in the prior two months. Against the US dollar, the leu recorded a notable appreciation, as a result of the significant weakening of the American currency on global financial markets in the first half of the period.
The annual growth rate of credit to the private sector continued to slow down rather swiftly in June, reaching 6.4 percent from 7.9 percent in May, as the particularly fast dynamics of the foreign currency component posted a steeper decline and the change in leu-denominated credit remained marginally positive. Therefore, the share of leu-denominated loans in credit to the private sector halted its descending path, inching up to 67.9 percent in June from 67.6 percent in May.
The updated forecast reconfirms the outlook for a further fall in the annual inflation rate over the next two years, on a somewhat higher-than-previously-anticipated path only in the medium segment of the projection horizon. Accordingly, the annual inflation rate will drop to single-digit levels at the beginning of 2023 Q3 and near the variation band of the target at the end of the projection horizon.
The fall will continue to be driven by supply-side factors, primarily disinflationary base effects and downward adjustments in some commodity prices, combined with the influences expected to come from the further contraction of excess aggregate demand, albeit at a slower tempo than in the previous projection.
The current inflation outlook is marked by heightened uncertainties, mainly stemming, in the short run, from the temporary cap on the mark-ups on basic food products but especially from the fiscal measures that are expected to be implemented with a view to boosting public revenues.
