CFA Society Romania expects the country’s economy to stall this year with GDP growth around 0%, with risks on the downside, as recession risk persists. The GDP growth will hover around 0–0.5% next year, while the use of EU funds is key to resume economic growth at more relevant rates starting from 2027, according to the ‘FY 2026 Macroeconomic Outlook’ report.
The authors of the report, CFA Romania’s vice-president Alexandra Smedoiu and president Adrian Codirlasu, expect the government to implement additional tax increases next year in its pursuit of fiscal consolidation, including a 1 percentage point (pp) increase in the standard VAT rate to 22%. The government may also further hike the excise duties, particularly for energy goods, after the increase operated by the government in August, along with the 2pp hike in the standard VAT rate to 21%.
“VAT is likely to increase again in FY26 by 1pp to 22%, in parallel with a revisit and reduction of span of transactions with preferential VAT rates (e.g., horeca, others),” the report reads, as quoted by Ziarul Financiar.
However, hiking taxes without a cost reduction agenda is unsustainable, CFA Romania warns.
The CFA Romania’s concerns of “financial repression”, mentioned a day earlier when the report was announced, is better explained in the report, and apparently the authors used the term primarily in its sense of stricter enforcement of fiscal regulations (while in its technical sense it means keeping the interest rates low as a debt management tool).
However, the authors also speak of the negative real interest rates until the end of 2026, in the context of the price shock caused by the VAT rate hike and higher excise duties in August this year that came on top of the electricity price liberalisation in July.
The negative real interest rates are seen as a driver pushing up consumption during the analysed period (besides being used by authorities as a public debt management strategy), but the report notes that the drop in real wages after years of unsustainable advance would play a moderating role.
Indeed, the lifting of the price-capping mechanism and the liberalisation of the natural gas price next March may further push up the prices.
CFA Romania expects headline inflation to decrease to 6%-7% by the end of 2026 from close to the double-digit rate during the second half of 2025 and the central bank to keep the policy rate at 6.5% until at least mid-2026. It also expects the National Bank of Romania (BNR) to hike the policy rate under a sovereign downgrade scenario (which the association sees as still relevant) or cut the rate faster in the case of economic recession (that would result in lower inflation as well, on the demand side drivers).
Keeping the policy rate steady at 6.5% technically results in a negative real policy rate over the analysed period (until the end of 2026).
However, the temporary character of the shock in prices that do not meet the definition of inflation (“a sustained and general increase in the overall price level over time, usually driven by excess demand, higher production costs, or monetary factors”) should be underlined. The monetary authorities treat such transitory price shocks differently compared to genuine inflation. The negative real policy rate resulting from such a transitory rise in prices is not a sign of “financial repression” in its technical definition.
The National Bank of Romania expected under its latest inflation forecast the constant tax inflation at 7.0% y/y at the end of September and 6.6% at the end of the year to further drop to 5.7% y/y in March. The inflation curve will probably be above this projection, but the inflation under constant taxes is still expected to drop below the 6.5% monetary policy rate in the first half of 2026, making the real monetary policy rate positive again.
iulian@romania-insider.com
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