Romania’s National Bank (BNR) revised upward its headline inflation projections for the end of 2021 to 4.1% (+0.7pp compared to the previous scenario) and for the end of 2022 to 3% (+0.2pp).

While the one-off shocks will prompt transitory effects this year, the economic recovery (and possibly higher commodity prices) may generate a deeper impact (still seen as moderate) next year.

The revision of the headline inflation may look wide (particularly for 2021), but BNR keeps the forecast for the adjusted CORE2 inflation roughly unchanged during this year - which consolidates analysts’ expectations for no policy tightening by the end of 2022. Specifically, BNR sees adjusted CORE2 inflation at 2.8% at the end of 2021 and at 3% at the end of 2022.

Nevertheless, BNR now foresees slightly stronger underlying inflationary pressures in 2022 as compared with the forecast released in March (provisioning CORE2 advance of 2.7%) on the back of better economic performance and higher inflation expectations. Furthermore, upside risks from broad-based increases in commodity prices and supply chain bottlenecks.

“We expect the BNR to remain on hold until Q4 2022 when the first 25bp key rate hike might be delivered. However, we see risks that the BNR could start earlier the policy rate hiking cycle if the central banks in Poland and Hungary would have to start raising their rates before Q4 2022,” Raiffeisen Bank writes in a research note.

As regards the headline inflation, BNR cited the sharp increase of the electricity price in January (+18%), an estimated 10% increase of the natural gas prices in July, and pressures on the volatile food prices in 2022.

The quarterly Inflation Report highlights the one-off nature of the shocks this year estimating that the inflation will return from above 4% this year to within the inflation band (2.5%+/-1pp) as early as the first quarter of 2022. 

iulian@romania-insider.com

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