The prospects for the annual inflation rate to level off and decrease rely on a milder impact of global supply-side shocks – inter alia in the context of energy price capping schemes implemented until March 2023 –, as well as on the sizeable disinflationary base effects, alongside the influences from the likely rapid contraction and closing of the positive output gap in mid-2023, followed by the output gap widening into negative territory.
Uncertainties are, nevertheless, associated with the presumed impact, but also the duration of energy and fuel price capping and compensation schemes. Notable risks also continue to come from developments in energy commodity prices, as well as from the persistent bottlenecks in production and supply chains — in the context of the war in Ukraine and the related sanctions —, to which add those from the protracted drought domestically and in other European countries.
“The war in Ukraine and the sanctions against Russia remain, however, a major source of uncertainties and risks to the outlook for economic activity, hence to medium-term inflation developments, through the possibly stronger effects exerted, via multiple channels, on consumer purchasing power and confidence, as well as on firms’ activity, profits and investment plans, but also by potentially affecting more severely the European/global economy and the risk perception towards economies in the region, with an unfavourable impact on financing costs”, according to central bank representatives.
At the same time, the absorption of EU funds, especially those under the Next Generation EU programme, is conditional on fulfilling strict milestones and targets for implementing the approved projects. However, it is essential for carrying out the necessary structural reforms, energy transition included, but also for counterbalancing, at least in part, the contractionary impact of supply-side shocks, compounded by the war in Ukraine. It is vital to absorb and reap the full benefits of these funds.
Major uncertainties and risks are also associated, however, with the fiscal policy stance, given the requirement for further budget consolidation amid the excessive deficit procedure and the overall tightening trend of financing conditions, yet in a challenging economic and social environment domestically and globally, which led to the implementation of several packages of measures to support households and firms, with potential adverse implications for budget parameters. From this perspective, the coordinates of the envisaged budgetary revision are particularly important.
In the meeting held on Friday (August 5, 2022), based on the currently available data and assessments, as well as in light of the very elevated uncertainty, the central bank’s board decided to increase the monetary policy rate to 5.50% per annum from 4.75% per annum, starting Monday (August 8, 2022). Moreover, it decided to raise the lending (Lombard) facility rate to 6.50% per annum from 5.75% per annum and the deposit facility rate to 4.50% per annum from 3.75% per annum, as well as to maintain firm control over money market liquidity. Furthermore, the central bank’s Board decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.