Isărescu: "Our monetary policy remains, to a large extent, restrictive"

• "The inflation forecast does not look bad, but two words abound in the BNR press release - risks and uncertainties"

• "I expect inflation in July to be above 5% again, but the inflation trajectory is clearly down"

The monetary policy of the National Bank of Romania remains, to a good extent, restrictive, even if the bank lowered the interest rate, stated, on Friday, the Governor of the National Bank of Romania, Mugur Isărescu, during the presentation conference of the "Quarterly Report on Inflation".

The bank revised downwards, to 4%, from 4.9% previously, the inflation forecast for the end of 2024 and estimates an inflation of 3.4% at the end of next year, according to the data presented by the governor.

Mugur Isărescu stated: "The annual inflation rate measured on the basis of the Consumer Price Index is below the previous forecast. The prognosis does not look bad, but in the text of the BNR communique, two words abound - risks and uncertainties. Apart from this forecast, we do not venture to say much about what we will do, because we remain dependent on what happens. We are "data addicts". In addition, autumn and the election campaign are coming and there are many unknowns. Regarding the tax perspective, we work with the data we have available at the moment. We don't know what policies will apply. Therefore, this trajectory is also dependent on the future of fiscal policies".

The governor said he expects inflation to be above 5% again next week, when the Institute of Statistics publishes July inflation. "We cannot walk around with the monetary policy rate depending on all these oscillations. There are ups and downs all the time, but the trajectory of inflation is clearly down. And that is how the entire monetary policy and inflation report is thought," said his lordship.

Mugur Isărescu added: "Very important, the main disinflationary contribution is anticipated to come from the evolution of the adjusted CORE2 rate, which we follow and on which monetary policy has a direct effect. This means that monetary policy is sufficiently firm, restrictive - it has not relaxed excessively. We went down with the monetary policy rate depending on how inflation also evolved, so that we are not stuck with the monetary policy rate in the autumn period when it will probably be more difficult or there will be disruptive factors that could to block us from a decision to reduce the monetary policy interest rate".

Isărescu emphasized that, by reducing the interest rate, it cannot be said that the BNR has started a cycle of monetary policy relaxation.

"We were not in a hurry to raise the interest rate either, because the inflation did not explode so much in the case of Romania, nor did we lower it extremely quickly as did, for example, the bank of Hungary or the bank of Poland, and then the bank of the Czech Republic, because in our country inflation went down more easily. We applied the "higher for longer" principle, there were also discussions related to the reason why we did not take the decision (no interest rate reduction) in May. We thought we still had to keep interest rates high. I bought it as the inflation rate came down, with some delay. When we lowered the interest rate, in no statement did we say that we "relaxed the monetary policy". This expression does not appear. I didn't use the phrase "we started a cycle of monetary policy easing" either, because it's practically not true that a cycle would start, because you have to consider several things, not only the nominal monetary policy rate, but also inflation , i.e. at the real rate. From this point of view, it can hardly be said that after having such high negative real interest rates, we now have an expansionary stimulatory monetary policy. It remains restrictive to a good extent", said Isărescu.

The governor added: "We don't use the idea that "we started a cycle of monetary policy relaxation", we don't use the expression "monetary policy relaxation" because we have really positive interest rates compared to the past and we are not pro-cyclical. Having an expansionary fiscal policy - big deficits, and our rule is to keep some restrictiveness. It is not pro-cyclical monetary policy, we do not stimulate the economy too much, fiscal policy stimulates it enough. We are very careful and fine tune".

The Board of Directors of the BNR decided, in the last two meetings in July and August, to decrease the monetary policy interest rate by 25 basis points, the key rate being currently 6.5%.