Romanian central bank: speeding up but not catching up

The press release underlines some interesting facts:

• The economic growth is estimated to have decelerated in 4Q21, “significantly below November 2021 projection”. The latest high frequency data does indeed point to a growth slowdown in the last quarter of 2021, “which makes it likely for excess aggregate demand to have shrunk in this period to a much lower-than-forecasted value”.
• Inflation projections (due to be published on 11 February together with the newest Inflation Report) show a “considerable worsening” in the near term. Basically, the NBR sees the headline inflation above 10% in 2Q22 when the current compensation schemes for households will expire. The subsequent decrease will be “probably only gradually” and the return within the 1.50%-3.50% variation band is estimated for 4Q23. While strong base effects will indeed push the inflation considerably lower in the second part of 2023, we do not expect it to enter NBR’s variation band but rather to close the year in the 4.0-4.5% range. Uncertainties remain abnormally high, especially in the short term, as a potential revision/extension of the support schemes could change the inflation picture substantially.
• A new addition has been made to the closing statement which now says that NBR’s decisions aim – among others – to “foster saving through higher bank rates”. The remark is interesting as it comes on the same page with mentioning of the lower-than-expected aggregate demand. It might seem that the Bank would like to avoid a situation where savers need to search for alternatives outside the banking system in order to get some protection against inflation. However, with interest rates below inflation even for loans, it might take a bit of time for the NBR decisions to filter through.