Romania’s central bank keeps policy rate at 7%, sees fiscal and income policies as major risks

In the meeting of August 7, 2023, the National Bank of Romania (BNR) Board decided to keep the monetary policy rate at 7.00% per annum, “based on the currently available data and assessments, as well as in light of the very elevated uncertainty. ”

The annual inflation rate went down in June to 10.25%, in line with forecasts, from 10.64% in May, amid the faster annual decline in fuel prices and the slower growth in processed food prices.

At the same time, the annual adjusted CORE2 inflation rate continued to decrease gradually, reaching 13.5% in June from 14.6% in March amid stronger disinflationary base effects, falling prices of commodities, primarily agri-food items, and the downward adjustment of short-term inflation expectations.

The updated forecast examined and approved by BNR on August 7 under the quarterly Inflation Report reconfirms the outlook for a further fall in the annual inflation rate over the next two years, on a somewhat higher-than-previously-anticipated path only in the medium segment of the projection horizon.

Accordingly, the annual inflation rate will drop to single-digit levels at the beginning of 2023 Q3 and near the variation band of the target at the end of the projection horizon.

The fall will continue to be driven by supply-side factors, primarily disinflationary base effects and downward adjustments in some commodity prices, combined with the influences expected to come from the further contraction of excess aggregate demand, albeit at a slower tempo than in the previous projection.

The current inflation outlook is marked by heightened uncertainties, mainly stemming, in the short run, from the temporary cap on the mark-ups on basic food products but especially from the fiscal measures that are expected to be implemented with a view to boosting public revenues.

Nevertheless, major uncertainties and risks are associated with the future fiscal and income policy stance, given the characteristics of the budget execution in the first six months of the year and the recent pay rises in the public sector. Adding to these is the fiscal package likely to be adopted in order to carry on the budget consolidation, whose final configuration is yet unknown.

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