National Bank of Romania (BNR) board decided to keep the monetary policy rate at 7.00% per annum at its meeting on August 7, “based on the currently available data and assessments, as well as in light of the very elevated uncertainty”.  

The annual inflation rate went down in June to 10.25% — in line with forecasts — from 10.64% in May, amid the faster annual decline in fuel prices and the slower growth in processed food prices. At the same time, the annual adjusted CORE2 inflation rate continued to decrease gradually, reaching 13.5% in June from 14.6% in March amid stronger disinflationary base effects, falling prices of commodities, primarily agri-food items and the downward adjustment of short-term inflation expectations.

The updated forecast examined and approved by the BNR on August 7 in the quarterly Inflation Report reconfirms the outlook for a further fall in the annual inflation rate over the next two years, on a somewhat higher-than-previously-anticipated path only in the medium segment of the projection horizon. 

Accordingly, the annual inflation rate will drop to single digits at the beginning of Q3 2023 and near the variation band of the target at the end of the projection horizon.

The fall will continue to be driven by supply-side factors, primarily disinflationary base effects and downward adjustments in some commodity prices, combined with the influences expected to come from the further contraction of excess aggregate demand, albeit at a slower pace than in the previous projection.

The current inflation outlook is marked by heightened uncertainties, mainly stemming, in the short run, from the temporary cap on the mark-ups on basic food products but especially from the fiscal measures that are expected to be implemented with a view to boosting public revenues.

Nevertheless, major uncertainties and risks are associated with the future fiscal and income policy stance, given the way the budget was executed in the first six months of the year and the recent pay rises in the public sector. Adding to these is the fiscal package likely to be adopted in order to carry on the budget consolidation, whose final configuration is yet unknown.