The country’s fiscal policy stance and the absorption of European funds, especially those under the Next Generation EU program, remain sources of uncertainties and risks to the inflation outlook, the central bank said in the detailed statement following its policy board meeting.
It said the upcoming budget revision and the budget consolidation strategy presumed to be prepared by this autumn, in line with EU recommendations, as well as the approval by the EC of the National Recovery and Resilience Plan were important from this perspective.
Additional risks stem from the synchronised uptrends in many commodity prices, likely to accelerate inflation globally.
Romania’s annual inflation rate went up to 3.24% in April 2021 from 3.05% in March, whereas in May it rose to 3.75%, exceeding the upper bound of the variation band of the central bank’s variation target of 1.5%-3.5%. The increase owed almost entirely to exogenous CPI components, particularly higher fuel prices driven by higher oil prices.
Economic activity continued to rebound in the first quarter of 2021 at a considerably faster pace than anticipated, albeit slower than in the previous quarter, thus recovering almost entirely the loss incurred in the second quarter of 2020.
The latest assessments indicate the outlook for the annual inflation rate to rise over the short time horizon to higher values than those in the latest medium-term forecast, published in the May 2021 Inflation Report, under the stronger transitory impact of supply-side factors. Determining factors are the larger hikes in energy prices, particularly of natural gas and electricity, the central bank said.
The central bank’s board decided to hold the benchmark interest rate at a record low of 1.25% a year. It also left its deposit facility rate unchanged at 0.75% a year and its lending facility rate at 1.75% a year.
It also decided to maintain minimum reserve requirements for local currency deposits at 8% and reserve requirements on foreign currency liabilities at 5%.
In the May Inflation Report, the central bank forecast inflation at 4.1% at the end of this year.