Banca Naţională a României

The annual inflation rate fell significantly in March 2023, down to 14.53 percent from 15.52 percent in February, mainly amid the drop in fuel prices against the same year-ago period.

Thus, in the first three months of 2023 overall, the annual inflation rate declined considerably (from 16.37 percent in December 2022), posting the first contraction in nine quarters, in line with expectations. The decrease was mainly driven by the sizeable drop in the dynamics of fuel and electricity prices, under the impact of significant base effects and the change made to the energy price capping and compensation scheme starting 1 January 2023.

At the same time, the annual adjusted CORE2 inflation rate halted its rise in Q1, reflecting its lower-than-expected advance in the first two months of the year and the March decline to the December 2022 level, i.e. 14.6 percent, amid disinflationary base effects, falling commodity prices, especially for agri-food items, as well as the downward adjustment of short-term inflation expectations. These fully offset the opposite influences that continued to come in Q1 from the gradual pass-through of increased costs of materials and wages into consumer prices, as well as from the preserved profit margins, in the context of the resilience of consumer demand, but also from the hike in the prices of some imported consumer goods.

The annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) went down to 12.1 percent in March 2023 from 14.1 percent in December 2022. The average annual CPI inflation rate and the average HICP inflation rate continued however to go up in 2023 Q1, reaching 15.3 percent and 13.2 percent respectively in March 2023 from 13.8 percent and 12.0 percent respectively in December 2022, but remained below the levels prevailing in the region and the Baltic countries.

The new statistical data reconfirm the stronger-than-expected economic growth in 2022 Q4 too, at a quarterly pace only mildly slower than in Q3, i.e. 1.0 percent compared to 1.2 percent, implying a new pick-up in excess aggregate demand during this period.

In addition, data reconfirm the step-up in the annual GDP dynamics to 4.5 percent in 2022 Q4 from 3.7 percent in the previous quarter. According to the new data, the main contribution to economic growth came during this period from household consumption, followed at a short distance by the contribution from gross fixed capital formation. Furthermore, the impact of net exports remained only marginally contractionary, as the large deceleration in the dynamics of the import volume recorded in this quarter exceeded that in the dynamics of the export volume of goods and services. Against this background, the annual rate of increase of the trade deficit halved, while that of the current account deficit posted an even stronger decline, inter alia following the improvement in the evolution of the secondary income balance, on account of inflows of EU funds to the current account.

The latest data and analyses point to a subdued slowdown in economic growth in 2023 Q1 and Q2, implying a mild deceleration in the first three months of the current year versus the same year-ago period.

Thus, in January-February 2023, retail trade and especially services to households continued to post a robust increase compared to the same year-ago period, motor vehicles and motorcycles sales gained further momentum, while industrial output saw a wider contraction and the volume of construction works recorded a considerably slower advance. Moreover, the annual change in the exports of goods and services exceeded that of imports, which saw a much steeper decline in the first two months of the year, probably owing, inter alia, to the improved terms of trade. Consequently, trade deficit and current account deficit narrowed significantly versus the same year-ago period.

The growth in the number of employees in the economy lost further momentum in January-February 2023, but the ILO unemployment rate receded to 5.4 percent in March, after its pick-up to 5.7 percent in 2022 Q4, while the particularly fast annual dynamics of unit labour costs in industry continued to accelerate. At the same time, the April surveys indicate a swifter decrease in the labour shortage reported by companies, but also an improvement in employment intentions in the near future.

The main interbank money market rates slowed their downward adjustment in April, while yields on government securities witnessed only small fluctuations – relatively in line with developments in advanced economies and in the region –, under the influence of successive revisions in investor expectations on the Fed’s prospective monetary policy stance, amid the banking system turmoil.

The EUR/RON exchange rate stuck in April to slightly lower values than those prevailing in 2022 H1, reflecting the high relative attractiveness of investments in domestic currency. Moreover, the leu strengthened significantly versus the US dollar, as the latter resumed its depreciation trend against the euro.

The annual growth rate of credit to the private sector slowed its decrease more visibly in March, reaching 10.2 percent from 10.6 percent in February, as the new moderate loss of momentum of the leu-denominated component was accompanied by the mild steepening in the uptrend of the particularly high dynamics of foreign currency loans. Therefore, the share of leu-denominated loans in credit to the private sector continued to fall relatively swiftly, diminishing to 67.8 percent in March from 68.3 percent in February.

In today’s meeting, the NBR Board examined and approved the May 2023 Inflation Report, which incorporates the latest available data and information.

The updated forecast broadly reconfirms the coordinates of the previous medium-term projection. Specifically, the annual inflation rate will probably remain on a downward path almost similar to that envisaged earlier, dropping to a one-digit level in 2023 Q3 and staying near the variation band of the target at the end of the projection horizon.

The decrease will be further driven by supply-side factors, especially by disinflationary base effects and downward corrections of some commodity prices. To these add the presumed impact of energy price capping schemes, as well as the influences expected from the prospective narrowing of the positive output gap, albeit slower than in the previous projection, implying its closing at the end of the forecast horizon.

At the same time, significant uncertainties and risks to the outlook for economic activity, hence to medium-term inflation developments, stem further from the war in Ukraine and the related sanctions, but also from the turmoil in the banking systems in the US and Switzerland. All this could have adverse effects primarily by affecting the economies of developed countries and the financing costs in Central and Eastern Europe.

Furthermore, the absorption of EU funds, especially those under the Next Generation EU programme, is conditional on fulfilling strict milestones and targets for implementing the projects. However, it is essential for carrying out the necessary structural reforms, energy transition included, as well as for counterbalancing, at least in part, the contractionary impact of supply-side shocks, compounded also by the tightening of economic and financial conditions worldwide.

Heightened uncertainties and risks are, nevertheless, associated with the fiscal policy stance, given on one hand the public deficit target set for 2023 in order to continue budget consolidation amid the excessive deficit procedure and the significant increase in financing costs and, on the other hand, the characteristics of the budget execution in the first months of the year, as well as the packages of support measures implemented or extended this year, in a challenging economic and social environment domestically and globally, with potential adverse implications for final budget parameters.

The Fed’s and the ECB’s monetary policy decisions, as well as the stance of central banks in the region continue to be relevant.

In the meeting held today, 10 May 2023, based on the currently available data and assessments, as well as in light of the very elevated uncertainty, the NBR Board decided to keep the monetary policy rate at 7.00 percent per annum. Moreover, it decided to leave unchanged the lending (Lombard) facility rate at 8.00 percent per annum and the deposit facility rate at 6.00 percent per annum. Furthermore, the NBR Board decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The NBR Board decisions aim to bring the annual inflation rate back in line with the 2.5 percent ±1 percentage point flat target on a lasting basis, inter alia by anchoring inflation expectations over the medium term, in a manner conducive to achieving sustainable economic growth. At the current juncture, the balanced macroeconomic policy mix and the implementation of structural reforms, also by using EU funds to foster the growth potential over the long term are of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand adverse developments.

The NBR closely monitors developments in the domestic and international environment and will continue to use the tools at its disposal to achieve the fundamental objective of price stability in the medium term.

The new quarterly Inflation Report will be presented to the public in a press conference on 12 May 2023 at 11:00 a.m. The account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the NBR’s website on 22 May 2023 at 3:00 p.m.

In line with the announced calendar, the next monetary policy meeting of the NBR Board will be held on 5 July 2023.