Romania Watch: Elevated and broad-based inflationary pressures in February
Inflation rate reached 15.5% yoy in February, above analysts’ consensus of 15.3%. Monthly inflation rate of 1% was the result of rapid and broad-based price increases for many consumer goods and services. We foresee the annual inflation rate to decrease towards 7% by December.
Annual inflation rate reached 15.5% in February, accelerating slightly from 15.1% in January, while remaining significantly below the peak of 16.8% recorded in November last year. Annual inflation print in February was close to our expectations of 15.6%, but above Bloomberg consensus of 15.3%.
On a monthly basis, consumer prices continued to increase rapidly in February, by 1%. The monthly dynamics was close to our estimates, being fuelled by relatively rapid increases of prices for most goods and services included in the consumer basket. In the context of broad-based increase of consumer prices, underlying inflationary pressures remained also elevated in February. Thus, according to our in-house seasonally adjusted data, monthly CORE 3* inflation rate stood at 1% in February, the gain being supported by a rapid increase of prices of both processed food products (+1.21% mom), as well as of non-food goods and services included in the CORE 3 structure (+0.83% mom). In this context, annual CORE 3 inflation accelerated to 15.1% in February from 14.9% in January.
Going forward, we expect the annual inflation rate to embark on a rapidly decreasing trend starting in March as the very elevated monthly inflation prints from 2022 will fade out of its computation and the intensity of inflationary pressures will gradually reduce. We currently forecast the annual inflation rate to be at 7.0% at the end of this year, and the core inflation rate to be at 8%. So, both headline and core inflation rates are forecasted by us to remain much above the upper limit of 3.5% of the central bank’s inflation target band this year. While reducing a lot from 2022, the inflationary pressures would remain elevated this year.
We consider that the central bank (NBR) has concluded the key rate hiking cycle at 7%. Given the elevated underlying inflationary pressures, we expect the NBR to maintain unchanged the monetary policy rate at 7% until Q2 2024, when a new key rate cutting cycle might start. However, the control over money market liquidity conditions is providing flexibility to the NBR to adjust rapidly the monetary policy stance. Thus, the NBR could restart using a firm control over money market liquidity instead of increasing the monetary policy rate if higher rates will be needed in the following period (if pressures for leu depreciation emerge of inflation dynamics surprises on the upside).
Note: CORE 3 inflation = CPI excluding administered prices, electricity and natural gas tariffs, volatile prices of fuels, fruits, vegetables and eggs, and prices of alcohol and tobacco
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Andreea-Elena DRAGHIA
Romania Andreea Draghia is a financial analyst at Raiffeisen Bank in Bucharest. She joined the Economic and Sectoral Research team in June 2020 primarily focusing on the developments in the Romanian economy. Prior to joining Raiffeisen Bank she worked as an economist at the Romanian Fiscal Council. She graduated the Faculty of Finance, Insurance, Banking and Stock Exchange and has a master’s degree in finance at the Advanced Research in Finance (CEFIN) within the Bucharest University of Economic Studies. Andreea is interested in macroeconomics and econometrics and has a passion for technology and travelling.
Nicolae COVRIG
Romania Nicolae has 20 years of experience in applied macroeconomic research, working as a financial analyst in the Economic and Sectoral Research Directorate of Raiffeisen Bank Romania. Nicolae is also an associate lector at the Bucharest Academy of Economic Studies, Department of Money and Banking. Previously, he worked as an economist in the Macroeconomic Modeling and Forecasting Directorate from the National Bank of Romania and as an assistant professor at the Department of Money and Banking from the Bucharest Academy of Economic Studies. Nicolae has a master's degree at the Doctoral School of Banking Finance (DOFIN) and a PhD in finance at the Bucharest Academy of Economic Studies. Nicolae is a member of CFA Institute and CFA Romania. He is passionate about macroeconomics and psychology.
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