Romanian central bank revises upward inflation forecast

The annual inflation rate will reach 4.2% at end-2019 and 3.3% percent at end-2020, compared to 4.1% in April, according to the baseline scenario included in the Inflation Report published by Romania’s central bank BNR on May 17.

Compared to the previous Inflation Report, the updated scenario incorporates a significant upward revision of this end-of-year forecast, by 1.2 percentage points (pp), and a marginal review of the end-2020 forecast, by 0.2pp.

BNR governor Mugur Isarescu pointed to threats posed by the external deficit and unsustainable growth, but he used metaphors (wage hikes are like medicine, not to be given in large amounts) rather than pointing directly to the Government for the rising twin deficits.

Isarescu made it clear that there is no ground for local currency weakening (except for the widening trade gap -- and this is still important, he added). He advocated against Balance of Payments correction by exchange rate re-alignment, arguing that this would lead to “a vicious circle," according to local Mediafax.

Isarescu’s statements on the monetary policy were neutral about a possible interest rate hike suggested by the high inflation and facilitated by the robust GDP growth rate (5% year-on-year in Q1).

“We do not exclude [the option of hiking the interest rate], but we can’t anticipate it,” Isarescu stated on an ambiguous note.

However, he confirmed expectations related to the central bank’s use of innovative monetary instruments, such as deposit certificates, to drain the liquidity, beside the current one-week repo-type deals.

“Perhaps there should be a tool to absorb liquidity more quickly. We keep things under control in a reasonable manner. We do not kill economic growth with the tools we have. We need to be careful with the way we calibrate monetary policy instruments. We do not want to achieve price stability at the cost of economic growth. We see things in a more complex perspective,” Isarescu said at the presentation of the quarterly Inflation Report.

(Photo source: Bnr.ro)