Romania keeps monetary policy at 7%, waits more clarity on disinflation

Romania's central bank (BNR), in its February 13 monetary board meeting, in line with the broad expectations, kept the monetary policy rate (chart) at 7%, according to the note published by BNR.

Romania's headline inflation dropped from a peak of 16.8% y/y in November 2022 to 6.6% y/y in December 2023, and the central bank expects steady disinflation over the coming eight-quarter forecast period (save for the inflationary impact of the fiscal package in January). However, only at the end of 2025 is the headline inflation seen within the 2.5%+/-1 percentage point (pp) target band.

The disinflation profile, slightly tweaked under the latest Inflation Report to be published on February 15 but broadly envisaging a downward trajectory after a (smaller than previously anticipated) rise in January, is driven by only supply-side factors while the demand-side developments (higher wages in the public sector, loose fiscal policy) are looking rather as upside risks.

Given the war in Ukraine and the developments in the Middle East and the Red Sea, even the supply-side factors look problematic, so the monetary authority will probably need more time before gaining more clarity.

At home, the phasing out of the energy price capping scheme and the new Pension Law (supposed to result in a 40% rise in pension as of September) are predictable major developments that still need clarifications, while the intense electoral year complicates the monetary authority's mission.

Even so, the expectations are for rate cuts later in the year of up to 100 basis points (bp), as the headline inflation would fall to 4.8% y/y at the end of the year under the outdated (and previous) Inflation Report. The timing of the rate cuts remains unclear, but it is reasonable to expect that BNR will not take any such step before another three months, and only in case the clarity on disinflation improves.

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