The National Bank of Romania Maintains 7.5% Inflation Forecast for Year-End

The National Bank of Romania (BNR) has kept its inflation forecast at 7.5% for the end of this year. In August 2023, BNR projected an inflation rate of 7.5% for the end of 2023 and 4.4% for the end of 2024. On Friday,  the central bank governor Mugur Isărescu announced a revised percentage for the end of 2024.

BNR increased the inflation forecast to 4.8% for the end of 2024, according to data presented on Friday by BNR Governor Mugur Isărescu. ‘This is probably the forecast you were expecting. It doesn’t differ much from the previous one in August. We have a confirmation of the forecast for the end of the year at 7.5%, unchanged, but an upward revision of the trajectory throughout 2024, in the context of legislated increases. We considered those. It involves the impact of the first round of VAT increases, bringing them to the same level, let’s say, or transitioning from three tiers to only two tiers, and excise increases. This impact is estimated at 0.9 percentage points, mainly occurring in the first quarter of next year, but later, we enter the same deflationary trajectory and reach the target range by the horizon of Q3, the third quarter of 2025. Which, to tease the monetarists a bit, as there are many monetarists in the room, is not bad, given the two wars and all uncertainties. For now, the forecast looks relatively good,” said Mugur Isărescu, who presented the Quarterly Inflation Report.

He explained that the main contribution to reducing inflation is the decrease in adjusted CORE 2 inflation, indicating that the strengthening of monetary policy and keeping interest rates relatively high for a longer period has had and will continue to have its effect.

“What is relatively new in this forecast is that we have an excess demand in a much faster decline than we saw in the summer months. It is forecast to be completely eliminated by the end of next year, in the context of anticipating a sustained pace of fiscal correction throughout 2024 and the continued transmission of the effects induced by the normalization of monetary policy here and worldwide. What risks do we see to these forecasts? Regarding the evolution of domestic demand, we see more downward risks than inflationary ones. Regarding the impact of raw material prices, intermediate and final goods, due to geopolitical tensions in the Middle East, we see upward risks. Fiscal policy and income policy pose risks in both directions. Some, such as measures to increase some taxes, which directly impact prices, are upward risks, but in terms of aggregate demand, thus achieving the budget deficit goals envisaged by the government, it leads inflation down. And in the labor market, from our point of view, considering it’s an election year, the risks are to push price increases up, to amplify price increases,” explained Mugur Isărescu.

The BNR Governor presented the Quarterly Inflation Report on Friday, which was analyzed and approved on Wednesday by the BNR Board of Directors.”