They also agreed that any potential central bank attempt to ward off the direct transitory direct effects of adverse supply-side shocks would be not only ineffective, but even counterproductive.
“The considerable worsening of the near-term inflation outlook was further attributable to the strong adverse supply-side shocks, particularly external ones, whose impact was, however, compounded on the domestic front by the liberalization of the electricity market for household consumers in 2021, Board members repeatedly underlined,” the central bank release says.
“Determining factors for the near-term outlook referred to the renewed large hikes anticipated for energy prices – especially of natural gas – and, to a smaller extent, for fuel prices, mainly on the back of the non-petrol-diesel component. To those added the further increase recorded in September by tobacco product prices, as well as the relatively higher dynamics expected for administered prices. They were likely to lead to a considerably larger and more protracted positive deviation of the annual inflation rate from the upper bound of the variation band of the target, Board members noted, while generating significant disinflationary base effects over the longer time horizon.”
The inflationary impact of supply-side shocks could be even stronger and lengthier than in the current assessments, several members cautioned, indicating the steady and/or abrupt rise in the prices of some energy and non-energy commodities, as well as the persistence of bottlenecks in production and supply chains, associated with increased transportation costs, visibly affecting – directly or indirectly – core inflation also, inter alia via import prices.
Mention was also made of the large share of food, energy and fuels in the CPI basket, as well as of the potential pass-through of higher costs of materials to consumer prices, amid the still robust, albeit moderating demand, alongside the foreseeable rise in prices of compulsory motor third-party liability insurance policies.
In that context, Board members voiced serious concerns over the risk that the inflation bout driven by supply-side shocks – implying the considerable and relatively persistent climb of the annual inflation rate above the variation band of the target – might deteriorate medium-term inflation expectations and thus trigger significant second-round effects, possibly via a wage-price spiral, given also the downtrend in the degree of labor market looseness.
Under the circumstances, the need for anchoring medium-term expectations was repeatedly underscored, also from the perspective of central bank credibility.
At the same time, it was agreed that any potential central bank attempt to ward off the direct transitory direct effects of adverse supply-side shocks would be not only ineffective, but even counterproductive, in view of the sizeable losses it would cause to economic activity and employment over a longer horizon.
(English version by Loredana Fratila-Cristescu)