Consumer price inflation is expected to peak at 11.2% in April, once the support schemes for household users of electricity and natural gas have expired, and will remain close to double-digits at the end of the year (9.6%), under the baseline inflation scenario unveiled by the National Bank of Romania (BNR).

Later, however, inflation it will subside quickly and enter the target inflation band at the end of 2023, the central bank expects.

Widening the scope of the forecast from just inflation, the BNR warned that large and persistent hikes in energy commodity prices pose relevant risks to economic activity as well. Downside risks to economic activity and upside risks to price dynamics are seen prevailing further.

Moreover, should such woes persist, this would weigh on the trajectory of macroeconomic variables over a longer horizon, the BNR’s Inflation Report reads. The lack of clarity about the compensation schemes the government may prolong opens the door to alternative scenarios. The BNR investigates the implications of a hypothetical scenario assuming a three-month extension, until June 30, of the current price ‘cap and subsidy’ scheme for electricity and natural gas consumption, finding that the path of the annual CPI inflation rate would run in the short term below that in the baseline scenario, and the peak would be reached with a one-quarter lag.

From a broader perspective, the relative prices of the energy inputs that will be established in Europe and in Romania after the equilibrium is reached, supposedly by the end of 2023, are particularly relevant, the central bank said. Under the baseline scenario, they will be significantly higher compared to the period before the inflationary shock.

The decarbonisation pace, the hydrocarbon trade routes and commercial arrangements, and developments related to Ukraine are key but not the only drivers, according to the BNR. What is certain is that the ‘new normal’ will mean more expensive energy hence, for countries like Romania, this means wider income disparity and higher energy poverty rates that need to be addressed by permanent measures. Tolerating weak tax collection rates is thus becoming an increasingly unacceptable scenario.