Romania Central Bank Lowers Inflation Forecast to 3% in 2020 from 3.1%

Romania's central bank sees year-end inflation at 3% in 2020 from a previous projection of 3.1%, central bank governor said Tuesday at a briefing on the February Inflation Report, news agency Mediafax reports.

Romania's central bank sees the annual inflation rate declining significantly in the early months of 2020 until around April, Isarescu said. The central bank sees the inflation rate at 2.8% in the first quarter of 2020.

It is then expected to resume a slightly upward movement in the latter part of this year to around 3.4%, remaining in the upper half of the variation band of 1.5%-3.5% until the end of the forecast horizon.

For 2021, the central bank sees year-end inflation at 3.2%.

Heightened risks to the inflation outlook stem from fiscal uncertainties, as Romania has a heavy election calendar in 2020. Compared to the November 2019 Inflation Report, the uncertainties about income and fiscal policies augmented. This assessment is based on both the budget execution profile of late 2019, leading to the significant opening of the government deficit, and a number of measures announced by the authorities, which, albeit enacted, are saddled with uncertainty over the time of their enforcement and the actual magnitude of the entailing adjustments.

For this year, fiscal and income policy configuration is also marked by the successive rounds of local and parliamentary elections. Under the circumstances, the risks associated with the fiscal policy stance could become manifest in both directions. Starting fiscal consolidation is desirable as soon as possible to ensure compliance with the reference budget ceilings consistent with the definition of sound public finances and with a balanced economic policy mix for mitigating the risks of a further rise in external imbalance, the central bank said.

Despite a slight easing of labor market tensions in the recent period, the risks associated with developments in this market remain particularly worrisome, in the current round as well, amid the labor shortage on certain market segments, the relatively elevated share of inactive population and the migration of active population.

A risk that remains relevant refers to future movements in administered prices, particularly in terms of the gradualness and magnitude of liberalization of the markets for electricity and natural gas delivered to household end-users.

Compared to the previous round, the risks of an economic slowdown in the euro area have subsided and signals have emerged of a possible easing of trade and technology tensions between the main economies engaged in the trade row, while the uncertainty surrounding Brexit has abated.

At the same time, risks are associated with a potential resurgence of geopolitical tensions and trade rows, which would enhance the fundamental vulnerabilities of some emerging markets.

Another risk factor that has emerged recently, yet carrying a notable potential of affecting the baseline scenario coordinates, refers to the possible spread of the coronavirus outbreak, entailing both direct and spillover effects on economic growth and prices worldwide. Opposite effects, i.e. of fueling economic growth, may stem from a possible easing of the monetary policy stance by the ECB and the Fed. The likely actions of other central banks in the region also remain relevant, given the local and the global context.

In view of the characteristics of the new medium-term inflation forecast and the multitude of related uncertainties and risks stemming from both domestic and external sources, also in the context of the monetary policy decisions by the ECB and the Federal Reserve, as well as of the probable stance of central banks in the region, the central bank board decided, in its 7 February 2020 meeting, to keep the monetary policy rate at 2.5% while maintaining strict control over money market liquidity.

The central bank board left the deposit facility rate unchanged at 1.5% and the lending (Lombard) facility rate at 3.5%.

In addition, the NBR Board decided to maintain the existing level of the minimum reserve requirement ratio on leu-denominated liabilities of credit institutions.

Given the developments in foreign currency lending and the adequate level of forex reserves, the board decided to cut the minimum reserve requirement ratio on foreign currency-denominated liabilities of credit institutions to 6% from 8% starting with the 24 February – 23 March 2020 maintenance period, aiming to continue the harmonization of the minimum reserve requirements mechanism with the relevant standards and practices of the European Central Bank and the major central banks across the European Union.

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