Romania’s central bank lowers inflation forecast and speaks of rate cuts

The inflation will remain on a general downward trajectory, with a temporary interruption in January this year, but the rate of disinflation is expected to slow down significantly over the next year, confirmed National Bank of Romania (BNR) governor Mugur Isărescu unveiling the updated Quarterly Inflation Report.

“Of course, we discussed a potential calendar for reducing the monetary policy interest rate,” Isarescu said, adding that the monetary authority will take such a step only after the inflation confirms a downward trend for at least two months after January. This would put the first rate cut no sooner than May, in line with the consensus expectations.

Romania’s central bank revised downwards the inflation forecast to accommodate lower-than-expected inflation at the end of 2023 (6.6% versus 7.5% under the November 2023 forecast round, broadly because of lower food prices), but the yearend target remained roughly the same (4.7% versus 4.8% previously) in 2024. The headline inflation will touch the upper limit of the 2.5%+/-1pp target band at the end of 2025.

Governor Isărescu also approached the exchange rate in the context of the wide CA deficit and the massive inflows of foreign currency (Resilience Facility, EU budget). Romania’s currency has strengthened by 6.4% in real terms over the past two years.

Isărescu admitted that BNR supported the RON in the context of a tense geopolitical context, considering the role of the exchange rate as an indicator of consumer confidence, but implied that this should not necessarily result in the appreciation of the local currency.

“Romania cannot afford the appreciation of the (local currency) RON due to the large current account deficit and will intervene to reduce the pressures of appreciation of the leu caused by the massive inflows of foreign currency,” Mugur Isărescu said.

(Photo source: Inquam Photos/Octav Ganea)