The increased animosity between the four parties that formed the governing coalition does not indicate, at this moment, a quick resolution of the political crisis, as the financial markets seem to be betting, according to an Erste Group research note consulted by Cursdeguvernare.ro.

While the headway and measures already enacted may provide some fiscal space to achieve the planned budget deficit target of 6.2% of GDP, the implementation of the reforms necessary to absorb funds from the PNRR (RRF) is put at risk if political instability persists, the analysts of the Austrian financial group argue.

"The political impasse led to the underperformance of Romanian government bonds and the weakening of the leu to a historic low against the euro," Erste said.

Erste increased the average inflation forecast for this year to 8%, following the recent depreciation of the leu and the relatively high pass-through of the exchange rate on inflation. Previously, the average inflation forecast for this year was 7.7%, by far the highest in the region, where the expected average is 3.8%.

On the monetary policy front, Erste expects no policy rate changes over the next four quarters – despite inflationary pressures. BNR will not cut the key interest rate this year, it could increase interbank interest rates, the Austrian bank argued.

"Although interest rate increases are highly unlikely, the National Bank of Romania (BNR) could tighten liquidity management to counter depreciation pressures on the exchange rate," warned Erste.

Erste had previously seen a possible cut in the key rate at the November meeting. Amid the complicated context of the Middle East War and the political turmoil that emerged in Romania, the Austrian bank sees interest rates remaining on hold for another year, until spring 2027.

Latest market developments indicate that although the local currency has plunged by over 3% versus the euro during the past week (witnessing significant outflows), the blue chip indicators at Bucharest Exchange rose both on May 5 and on May 6 while the long-term yields of the Romanian bonds (10 years) moderated in the aftermath of the May 5 overthrow of prime minister Ilie Bolojan on Middle east development effects.

iulian@romania-insider.com

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