Romania’s central bank cuts policy rate by 25bp to 6.75%
<p>Romania’s central bank cut the monetary policy rate by 25 basis points (bp) to 6.75% on July 5, in line with consensus expectations. This was the first such move after the rate had stayed at 7% since January 2023 to fight inflation.</p>

<p>Analysts expect further cuts to bring the policy rate to 6% by the end of the year, while a more cautious stance vis-a-vis inflationary risks could slow down the monetary easing cycle.&nbsp;</p>

<p>The central bank signaled it would lower the inflation forecast, in line with the consensus forecast – but it points to the inflationary risks posed by the budgetary and income policies. &nbsp;</p>

<p>BNR also speaks about “a notable quarter-on-quarter economic growth in 2024 Q2, visibly more robust than previously anticipated, implying a marked step-up in the annual GDP dynamics.”</p>

<p>“According to current assessments, the annual inflation rate will decline further over the following months, on a significantly lower path than that shown in the May 2024 medium-term forecast [4.9% y/y yearend inflation], primarily due to base effects and legislative changes in the energy field, as well as amid the deceleration in import price growth and the gradual downward adjustment of short-term inflation expectations,” the central bank’s note issued on July 5 reads.</p>

<p>It also notes that “heightened uncertainties and risks stem from the future fiscal and income policy stance, given on one hand the budget execution in the first five months of the year [3.6%-of-GDP deficit vs. 5%-of-GDP full-year target], the public sector wage dynamics and the full impact of the new law on pensions [as of September 2024], and on the other hand the fiscal and budgetary measures that could be implemented in the future to carry on budget consolidation.”</p>

<p>Since the risks are expected to materialize after the end of the year, the central bank might take a more cautious position (fewer rate cuts) than justified by inflation’s trajectory.</p>

<p>Based on expectations of 4% yearend inflation and 5.1% core inflation at the end of the year, in the context of 2.6% GDP growth (versus 3.5% potential growth), Erste Research estimates that the central bank could cut the policy rate to 6% by the end of the year. A more cautious approach could result in a 6.25% monetary policy rate by the end of the year.&nbsp;</p>

<p><em>iulian@romania-insider.com</em></p>

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