In line with broad consensus, Romania's central bank (BNR) decided to keep interest rates unchanged at 6.5% in the May 16 meeting. 

Amid persistent inflation (5.3% y/y CORE2 inflation in March-April) and fiscal uncertainties, analysts expect the first rate cut no sooner than this autumn. Disappointing growth and monetary policy stance of the ECB and peer countries could trigger such a decision sooner rather than later, according to an Erste Bank Group report. On the contrary, fiscal concerns, increased FX vulnerability due to elevated risk premia and sovereign rating risks, as well as high and mostly upside inflation forecast uncertainties, could ultimately outweigh them in favor of a more hawkish stance.

In the press release following the rate decision, the central bank mentioned a significantly higher inflation path than previously estimated. The new BNR forecast will be published on May 20, along with the quarterly Inflation Report. 

The current BNR forecast has an annual CPI of 3.8% by year-end. The upward revision was expected and is in line with the higher-than-anticipated CPI evolution in the first four months.

Based on the latest assessment, the BNR expects inflation to enter only marginally below the upper bound of the variation band of the target in the first quarter of 2026. 

Erste Bank Group expressed expectations for the CPI to end 2025 at 4.0% y/y in a scenario with no fiscal policy change that would significantly impact the CPI.

In its press release issued after the monetary board meeting, the BNR also drew attention to the negative effects of the recent political turmoil on the local financial market: 

The protracted electoral period and the rising political tensions reversed capital flows in the local financial market. Lately, capital outflows have increased significantly in various forms. These shifts have had a major impact on liquidity and on money market rates, as well as on the demand-and-supply ratio in the forex market, Romania's foreign exchange reserves, and the local currency's exchange rate.

iulian@romania-insider.com

(Photo source: Lcva/Dreamstime.com)