It also predicts an annual inflation rate of 3.4% for the end of 2025 from 3.5% previously, expecting it to fall within the target corridor due to recent more favorable price developments than previously anticipated.
Inflation fell below 5% in June 2024 and has recently been below both the central bank’s key rate, which stood at 7% per year until recently, and the deposit facility rate that has influenced market trends for over a year and a half. The central bank started the monetary easing cycle in July 2024 when it decided to lower its key rate to 6.75% a year from the 7% level left unchanged since January 2023. Isarescu warned of economic risks and uncertainties, stating, however, that there is no talk of monetary policy easing—despite a 0.5 pp reduction in the key rate—while the budget deficit remains high.
The governor explained that the central bank avoided using the term monetary policy relaxation in the press statements published after the meetings in July and August, when it reduced the key rate by 0.25 percentage points, from 6.75% per year to 6.50% per year, respectively. “We are not using the idea that we have started a monetary policy easing cycle, nor are we using the term ‘monetary policy easing’,” he pointed out.
“We have an expansionary fiscal policy. We are not excessively stimulating the economy; the fiscal policy is doing enough. High budget deficits (3.5% of GDP over six months, compared to an annual target of 5%) keep Romania’s borrowing costs and risk premiums high, the latter being the highest in the region. Regarding the fiscal outlook, we clearly don’t know what policies will be implemented, so this trajectory is tied to the future of fiscal policies,” he also emphasized.
According to the governor, “in the case of services, salaries hold a greater weight and productivity increases cannot be very high. So we expect services to keep inflation relatively higher in Romania, as long as the real convergence works”.
Romania’s central bank decided at its Board meeting on Wednesday (August 7) to lower its benchmark interest rate to 6.50% a year from 6.75% a year, starting August 8. In the interbank market, this decision triggered the decrease of the three-month ROBOR index, the interbank interest rate used as a reference to calculate variable interests for loans in lei taken out before May 2019, down to 5.59% a year on August 8, from 5.80% a year the day before.