BNR: Annual inflation rate expected to rise early next year

The annual rate of inflation is expected to rise at the beginning of next year, due to the impact of growth and introduction of taxes and duties, states the National Bank of Romania (BNR), in a press release.‘In the meeting of today, the BNR Board analysed and approved the Report on Inflation, November 2023, document including the most recent data and available information. The updated prognosis reconfirms the perspective of the continuation of the drop in the annual inflation rate along the next two years, on a higher trend in 2024 as compared to the previous prognosis, but slightly lower along the following quarters. Thus, the annual rate of inflation is expected to increase at the beginning of next year – due to the impact of growth and introduction of taxes and duties – and decrease gradually in the following quarters, as well as accelerate its drop in 2025, decreasing in the interval of the target at the end of the horizon of prognosis’ the press release says.,According to the BNR, the decline will be further driven by supply-side factors, mainly disinflationary base effects and downward corrections in some commodity prices, coupled with influences expected to come from the relatively abrupt narrowing of the aggregate demand surplus from Q3 2023 onwards and from the GDP gap entering negative territory towards the end of next year - several quarters earlier than previously projected.   Uncertainties and significant risks at the address of the perspective of inflation come from the increase in taxes and duties destined to accelerate the budgetary consolidation, potentially supplemented in perspective, as well as from the evolution of the oil quotation, in the context of the conflict in Middle East.Similarly, BNR says that uncertainties and important risks stay associated as well to the future behavior of the fiscal and income policy, as the recent measures aiming at the limitation of budgetary expenses in 2023 and the possible increase in the following years of the package of fiscal and budgetary corrective measures as well as the potential implications of the new laws regarding pensions and salaries in the public sector, and the possible new salary increases offered to the budgetary personnel.At the same time, significant uncertainties and risks to the outlook for economic activity, including the medium-term evolution of inflation, stem from the war in Ukraine and the conflict in the Middle East, as well as the below-expected economic developments in Europe, particularly in Germany.   At the same time, the absorption of European funds, mainly those related to the Next Generation EU programme, is conditional on meeting strict targets and milestones. It is, however, essential to achieve the necessary structural reforms, including the energy transition, but also to counterbalance, at least partially, the contractionary impact of supply-side shocks, which has also been amplified by the tightening of international economic and financial conditions.   According to the central bank, the outlook for the conduct of the ECB's and Fed's monetary policies and the attitude of central banks in the region are also relevant. In the Wednesday meeting, 8th November 2023, on the basis of evaluations and available data at the moment, as well as due to high uncertainties, the BNR Board decided to keep the rate of monetary policy interest at the level of 7,00 % per year. At the same time, it was decided to keep the interest rate for the credit facility (Lombard) at 8% per year and the interest for deposit facility at 6% per year. Similarly, the BNR Board decided to keep the present levels of minimum compulsory reserves for the liabilities in lei and foreign currency of credit institutions.The new Quarterly Inflation Report will be presented to the public at a press conference on 10 November 2023 at 11:00. The minutes of the deliberations on the adoption of the monetary policy decision at today's meeting will be published on the BNR website on 20 November 2023 at 15:00. According to the calendar, the next monetary policy meeting of the BNR Board will take place on 12 January 2024.