Romania’s central bank, the National Bank of Romania (BNR), kept the monetary policy rate (chart) at 7% at its February 13 monetary board meeting, in line with expectations, according to a note published by the BNR.

Romania's headline inflation dropped from a peak of 16.8% y/y in November 2022 to 6.6% y/y in December 2023 and the central bank expects steady disinflation over the coming eight-quarter forecast period (save for the inflationary impact of the fiscal package in January). However, headline inflation is only expected to return within the 2.5%+/-1 percentage point (pp) target band at the end of 2025. 

The forecast for inflation, slightly tweaked in the latest Inflation Report to be published on February 15, is broadly a downward trajectory after a smaller than previously anticipated rise in January. Disinflation is driven  only by supply-side factors, while the demand-side developments (higher wages in the public sector, loose fiscal policy) are looking rather as upside risks.

Given the war in Ukraine and the developments in the Middle East and Red Sea, even the supply-side factors look problematic, so the monetary authority will probably need time to gain more clarity.

At home, the phasing out of the energy price capping scheme and the new Pension Law (supposed to result in a 40% rise in pension as of September) are major developments that still need clarifications, while the intense electoral year complicates the monetary authority’s mission.

Even so, the expectations are for rate cuts later in the year of up to 100 basis points (bp) as the headline inflation would fall to 4.8% y/y at the end of the year, according to the previous Inflation Report.  The timing of the rate cuts remains unclear, but it is reasonable to expect that the BNR will not take any such step before another three months, and only in case the clarity on disinflation improves.