Romania’s National Bank (BNR) surprised the market by hiking the refinancing rate by 50bp to 25% - a move that was seen as necessary by most but not expected by many, given the past dovish policy pursued by the monetary authority, seen as excessively concerned with the side effects of the interest rate normalization.

Headline inflation exceeded BNR’s forecast and reached 8.2% at the end of 2021, while CORE2 inflation was 4.7%.

This has reflected the effects of the rise in agri-food commodity prices and energy and transport costs, as well as the influences of persistent bottlenecks in production and supply chains, compounded by increasingly higher short-term inflation expectations and the large share of imported goods in the CPI basket, BNR explained. In brief, nothing that would vanish by itself within a reasonable period of time. 

Based on a bleaker inflation outlook and in light of the elevated uncertainty generated by the absorption of EU funds or fiscal stance (both linked to the Executive) rather than by a new Covid wave, the BNR’s Board decided to increase the monetary policy rate to 2.50% per annum from 2.00% per annum as of February 10, 2022, and to shift upward accordingly the interest rates corridor to 1.5%/3.5%.

The February 2022 Inflation Report, to be published on February 11, includes a revised scenario showing a considerable worsening of the short-term outlook for inflation, under the strong impact of supply-side shocks, mainly of energy prices.

The forecasted path of the annual CPI rate has been again revised “markedly upwards” over the short-term horizon, the BNR revealed in advance.

Specifically, the annual inflation rate is expected to significantly accelerate its growth in 2022 Q2 and thus rise to a double-digit value, mainly as a result of far higher increases in natural gas and electricity prices, which will be strongly manifest after the withdrawal in April of compensation schemes for household consumers.

Moreover, thereafter, the annual inflation rate will decrease probably only gradually, on a much higher-than-previously-forecasted path, but will witness a relatively steep downward adjustment in the first part of next year and return inside the variation band of the target in 2023 Q4 due to sizeable base effects, as well as to far lower values of the aggregate demand surplus foreseen over the forecast horizon and progressively declining as of mid-2022.

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iulian@romania-insider.com