Romania's central bank cuts inflation forecast to reflect electricity price regulations

The consumer price inflation will ease to 7% by the end of the year, from 15% as of January, and will further reach 4.2% at the end of 2024, according to the revised Inflation Report published by the National Bank of Romania (BNR) on February 15.

The 4.2pp downward revision for this yearend's inflation (seen at 11.2% as of November) is mainly the effect of the Government prolonging the electricity price "cap and subsidy" scheme until the end of 2025. In November, assuming the electricity price scheme would continue (as it actually happened), BNR was projecting 7.2% inflation as of December 2023.

The central bank couldn't have done better to tame inflation, BNR governor Mugur Isarescu argued, explaining that higher key rates would have "killed" companies. Furthermore, higher rates in the future would further strengthen the currency – a scenario Isarescu doesn't encourage, given the external (current account) deficit that widened above 9% of GDP last year.

"When you reach 10% of GDP current account deficit, you have to be very careful. We had a similar situation in 2008," warned Mugur Isarescu.

On the upside, the CA financing "is really good" – even if most of the FDI consists of reinvested earnings. "It shows a bit of confidence in the economy, it looks like not everything is lost," governor Isarescu commented.

Speaking about further moves of the policy rate, he didn't entirely rule out the possibility of further rate hikes – as the uncertainty remains high, related to exogenous factors.

(Photo source: Inquam Photos/Octav Ganea)