Cristian Geanaliu, Executive Director of Global Markets at Garanti BBVA Romania, analyzes the persistent inflation and the ongoing imbalance between monetary and fiscal policies shaping Romania’s economic outlook for 2026.
Romania enters the last quarter of 2025 within a complex macroeconomic framework. An inflation rate well above the central bank’s target, high interest rates, a persistent budget deficit, and mounting pressures on public finances will continue to shape the economic trajectory in 2026, a year likely to be marked by efforts toward fiscal adjustment and the consolidation of the macroeconomic stability.
Inflation remains above the National Bank of Romania’s target, while the key policy rate is still maintained at 6.50%, a high level, following a tightening cycle that started relatively later than in other Central and Eastern European countries but continued decisively.
In parallel, fiscal policy is undergoing a phase of structural adjustment, which has included, among other measures, increases in certain indirect taxes (VAT and excise duties) and the removal of the electricity price cap. Although these measures aim to achieve medium-term fiscal consolidation, they also generate immediate inflationary pressures and pose challenges to coordination with monetary policy. Even with the introduction of measures intended to curb aggregate demand, fiscal policy is not completely restrictive overall. High expenditure levels and existing commitments remain expansionary, maintaining upward pressure on the budget.
The evolution between 2019 and 2025 of the monetary policy rate, the annual inflation rate, and the adjusted CORE2 inflation rate illustrates the gradual transition of monetary policy from an accommodative to a restrictive stance. During the 2019–2021 period, the monetary policy rate remained below the inflation rate, resulting in negative real interest rates and giving monetary policy a procyclical character. Under these conditions, lending and consumption were stimulated, fueling inflationary pressures.
Subsequently, amid energy and geopolitical shocks, inflation accelerated sharply, exceeding 17% and prompting Romania’s central bank to initiate a rapid monetary tightening cycle. The increase of the key policy rate from 1.75% to 7.00% by the end of 2023 marked a shift toward a restrictive policy stance, characterized by positive real interest rates and a firmer anchoring of inflation expectations.
However, the transmission of the monetary policy decisions to the real economy proved to be asymmetric. While ROBOR reacted almost immediately to policy rate changes, IRCC adjusted with a significant lag, reflecting structural differences between the interbank market and household lending, partially coming from the IRCC definition. This delay mitigated the short-term impact of restrictive measures on domestic demand, contributing to the persistence of inflation above target band. Moreover, the lack of alignment with fiscal policy weakened monetary transmission, forcing NBR to keep high interest rates for an extended period amid ongoing inflationary pressures and persistent structural deficits.
While monetary policy has taken on a restrictive and countercyclical stance, fiscal policy has consistently remained procyclical, contributing to persistently high structural deficits and the deepening macroeconomic imbalances. During periods of economic growth, additional revenues were not used to reduce the deficit or build fiscal buffers but rather to finance higher spending and tax relaxations. This approach has perpetuated large deficits even when the economy operated above potential, while the rigid structure of expenditures – dominated by wages, pensions, and subsidies – has significantly limited the room for fiscal adjustment.
A recurring feature of Romania’s economy is the lack of coordination between fiscal and monetary policy, particularly during election periods. The overlap of the electoral and economic cycles during 2024–2025 has led to insufficient fiscal adjustment, amplifying pressures on public finances and shifting part of the stabilization burden onto monetary policy, forcing the National Bank to maintain a restrictive stance.
Through the aggregate demand channel, fiscal policy has fueled the inflationary pressures, while temporary or short-term measures have contributed to maintaining high inflation expectations. This environment has reinforced the wage–price spiral and complicated the central bank’s mission, deepening structural imbalances and exposing economic vulnerabilities.
This dynamic is also reflected in the relationship between the budget deficit and the economic cycle. Even in years when the economy operated close to potential, such as 2019, the deficit remained high, and during periods of economic slowdown, it deepened significantly, confirming the procyclical nature of fiscal policy.
The analysis of the data in the chart highlights the persistence of a procyclical fiscal pattern. In 2019, the economy operated above potential (output gap +0.9%), yet the budget deficit reached 4.3%, a clear example of procyclical policy. In 2020, amid the pandemic-induced recession, the fiscal impulse led to a deficit of 9.2% of GDP, reflecting a countercyclical approach. After 2021, however, large deficits (above 6% of GDP) persisted, even as the economy moved close to or slightly above potential. Data for 2024 indicate a deficit of 9.3%, associated with a negative output gap, signaling difficulties in fiscal consolidation and the risk of maintaining a structural imbalance over the medium term. At the same time, the electoral character of 2024 limited the adoption of firm adjustment measures, maintaining an expansionary fiscal stance that undermined the credibility of medium-term consolidation efforts.
This evolution confirms that, although fiscal policy played a countercyclical role in 2020, during the rest of the period under review it remained procyclical, with high budget deficits persisting both during phases of expansion and periods of economic slowdown.
The planned gradual reduction of the budget deficit over a seven-year horizon to below the EU threshold of 3% of GDP, alongside the implementation of the National Recovery and Resilience Plan (NRRP/PNRR), are essential steps. However, they remain insufficient without credible fiscal discipline. Romania is currently undergoing a fiscal adjustment process, yet some of the recent measures continue to generate short-term price increases across the economy, complicating coordination with monetary policy.
The upcoming period will therefore be defined by the need to synchronize policy agendas – fiscal consolidation through a gradual deficit reduction, efficient absorption of NRRP funds, and completion of reforms required by the OECD – in a context where NBR maintains a restrictive and countercyclical monetary policy aimed at anchoring inflation and stabilizing market expectations. A transparent and predictable fiscal policy is essential to foster a climate conductive to investment and sustainable growth.
*This is expert content provided by Garanti BBVA Romania.
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