The National Bank of Romania (BNR), on October 8, in line with expectations, kept the monetary policy rate at 6.5% amid the “above-expectations transitory effects” of the expiry of the electricity price-capping scheme in July and the VAT rate hike and higher excise duties in August that reshaped the inflation trajectory over the next year.
The BNR expects the annual inflation rate to reach a plateau at the end of Q3 and decrease “very slowly” over the following three months.
However, Romania’s monetary authority expects the package of fiscal and budgetary measures adopted by the government in July to entail increasingly stronger underlying disinflationary pressures over the longer horizon, especially from aggregate demand, mainly via the fiscal adjustment thus initiated in 2025 and probably tighter next year, which will also lead to a sizeable correction of the current account deficit.
The remark on the long-term disinflationary pressures and the transitory measure of the inflation peak these months gives an overall dovish tone to the central bank’s rhetoric, but the first rate cuts are still not expected over the next several quarters, and the calendar is contingent on developments marked by multiple uncertainties.
High uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, continue to arise from the external environment, given the global trade tensions, as well as the war in Ukraine and the Middle East situation, on one hand, and the plans to increase defence and infrastructure investment spending in EU countries, on the other.
Uncertainties are, nevertheless, further associated with the measures likely to be adopted in the future in order to continue budget consolidation in line with the National Medium-Term Fiscal-Structural Plan agreed with the European Commission and with the excessive deficit procedure.
On the economic growth side, the central bank expects “a near-stagnation of economic activity for 2025 H2 overall, associated, however, with an increase in annual GDP growth in Q3, amid mixed developments across the aggregate demand components and major sectors.”
The “near-stagnation of economic activity” interpreted as the seasonally-adjusted GDP remaining, during Q3-Q4, at the same level as in Q2, is consistent with a 1.5% y/y growth rate for the full year.
Assuming GDP stagnates at the average level of Q1 and Q2, this would result in a 1.3% GDP growth for the entire year – still a bit optimistic but in line with the latest forecast of Erste Group. In contrast, however, the CFA Romania Association issued this week a forecast implying near-stagnation of the GDP this year and 0-5% growth in 2026.
This implies significant economic contraction in Q3 and Q4 – 5% below the average level reached in Q1-Q2 and a 5.6% q/q GDP decline in Q3.
iulian@romania-insider.com
(Photo source: Lcva/Dreamstime.com)
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