The magnitude of the rise in the consumer prices in December, resulting in a record 8.2% annual inflation rate - the highest in the past decade, took the analysts by surprise. In response, they put on hold projections until Government announces the promises steps aimed at taming the energy prices, not excluding nevertheless double-digit inflation rates later in the year.

The differential inflation combined with a steady exchange rate supported by the inflows under the Resilience Plan and EU budget may support real appreciation of the currency with a negative impact on the balance of payments (BoP).

While currency depreciation may not be a fix for the current account deficit (as the national bank of Romania has constantly argued), the strengthening may complicate the settlement of the country's wide external balance. 

The market expected 7.9% annual inflation in December (Bloomberg poll), compared to the actual 8.2% announced by the statistics office INS. At the same time, the CORE rate of inflation accelerated to 4.7% in December from 4.3% in November, revealing strong inflationary pressures. 

By the end of 2022, BCR Research anticipates an annual core inflation rate of 4.6% YoY, revised up by 0.2pp compared to the previous projection in November.

Adrian Codirlaşu, vice-president of CFA Romania, says that this year inflation will reach a peak, somewhere in the second or third quarter, which means that it is not excluded to see double-digit inflation in 2022. 

"My view is that inflation will remain high for several years. Not at the current level, but at a much higher level than before the crisis," said the vice-president of CFA Romania, quoted by daily Bursa. He said that he believes that central banks, globally, will not be so aggressive in trying to bring down inflation because governments are over-indebted. This over-indebtedness will keep central banks from raising interest rates too much to fight inflation, Codirlaşu says.

ING Bank Romania put on hold its 7.2% average inflation estimate for 2022 "until we get more clarity on the set of measures adopted." "While the caps and subsidy measures already in place would mostly delay the unavoidable inflation spike when they expire, a permanent VAT cut could have a more significant and sustainable impact, possibly reducing headline inflation by over 1-2ppt this year. Hence, until we have more clarity on the new measures, our 7.2% average inflation forecast for 2022 is on hold."

ING Romania also said that it expects the National Bank to hike the refinancing rate up to at least 3% this year (from 2.0% currently) even if the administrative measures under discussion could also be a reason not to push on with larger rate hikes.

(Photo: Bizroug/ Dreamstime)

iulian@romania-insider.com