“According to current assessments, the annual inflation rate will stick to an upward path until mid-Q3, under the impact of supply-side shocks, yet at a visibly slower pace, thus climbing moderately above the values forecasted in May over the short time horizon”, the central bank’s Executive Board said in a statement regarding the monetary policy decisions made on Wednesday (July 6).
Behind the worsening of the near-term inflation outlook stand the higher dynamics anticipated over the following months for the prices of fuels, natural gas and electricity – even amid the support schemes in place and some base effects –, as well as for processed food prices. This is mainly ascribable to the stronger advance in crude oil, energy and agri-food commodity prices, owing to the war in Ukraine and the associated sanctions. Additional inflationary effects are also expected from administered prices, including as a result of rail fare increases, as well as from tobacco product prices, following an increase in the specific excise duty, the statement reads.
Moreover, notable risks continue to come from developments in energy commodity prices, as well as from the persistence of bottlenecks in production and supply chains, amid the war in Ukraine and the related sanctions, to which add those stemming from the recently announced measures for increasing budget revenues.
The protraction of the war in Ukraine and the expansion of sanctions against Russia generate, however, considerable 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, as per the statement.
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 and the related sanctions, as well as the effects of fiscal consolidation.
“It is vital to reap the full benefits of these resources,” according to central bank officials.
Rising 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.
Particularly relevant are also the ECB’s and the Fed’s prospective monetary policy stances, as well as the size and pace of key rates increases by central banks in Czechia, Poland and Hungary.
In the meeting held on Wednesday (July 6, 2022), Romania’s central bank raised its benchmark interest rate to 4.75% a year from the current rate of 3.75% a year, starting July 7, 2022. The central bank also raised the interest rate for its deposit facility to 3.75% a year from 2.75% a year and the interest for its (Lombard) lending facility to 5.75% a year from 4.75% a year, applicable as of July 7. It also decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.