Isărescu: "This is not the time to discuss an interest rate reduction"

The National Bank of Romania (BNR) is not considering a reduction in the monetary policy interest rate until inflation falls sharply, Governor Mugur Isărescu said on Friday, during the conference where he presented the "Quarterly Report on Inflation".

The governor stated: "For now we cannot even discuss a reduction. We have high inflation, above the policy rate, and it's not clear that it's going down. There may still be shocks that push prices up. That's why I say very clearly - it's not even the time to discuss a possible reduction, but to make a decision. We have nothing to discuss because we create expectations, we don't fulfill them, and everyone has something to lose."

Isărescu emphasized that interest rates in the market have dropped significantly, from 8% to 6%, but that, probably, the expectations are that interest rates will drop even more.

"We don't want to give this feeling. There is scope for a further reduction in interest rates, which have fallen anyway and there is liquidity in the market (...). Do not expect that in the next period, until inflation goes down well, we will make any decision to reduce the monetary policy rate", the governor said, adding: "The worst combination is to go with the monetary policy rate down, find that inflation is not falling and raise the rate again. We do not play with the monetary policy rate. We are still playing games, within certain limits, with the interest rates on the market".

• Isărescu: "We are reaching the inflation target range in the third quarter of 2025"

The NBR maintained its inflation forecast at 7.5% in the fourth quarter of this year, while for the first quarter of 2024 it sees a slight increase in inflation to 7.7%, which will decrease to 4.8% , at the end of next year.

Isărescu stated: "We have a reconfirmation of the forecast for the end of the year at 7.5%, it is not modified, but it is an upward revision of the trajectory during the year 2024, in the context of the legislated increases, which we took into account, of some fees and taxes. It is about the first-round impact of VAT increases, bringing them to the same level or moving from three steps to only two steps and increasing excise duties. This impact is estimated at 0.9 percentage points, which occurs mainly in the first quarter of next year, but then we enter the same disinflation trajectory and we reach the target range at the horizon of the third quarter of 2025. Which is not bad, in the context of two wars and all the uncertainties that exist. For now, the forecast looks relatively good."

According to the governor, the main contributor to the decline in inflation is the reduction in adjusted CORE 2 inflation, which shows that the tightening of monetary policy and keeping interest rates relatively high for a longer period of time have had and will continue to have an effect.

Related to the risks to the fulfillment of the NBR forecasts, the governor emphasized that, regarding the evolution of domestic demand, the bank does not see inflationary risks, but rather the opposite. "Related to the impact of the prices of raw materials, intermediate and final goods due, in particular, to the geopolitical tensions in the Middle East, we see upward, growth risks. Fiscal and revenue policies are risks in both directions," the governor said.

• "We will have to be very careful about the mix of economic policies that will continue the disinflation, without creating a recession", said Isărescu

The governor pointed out that inflation in our country has come down without going into recession, but there is an obvious moderation in economic growth in the second quarter, which is likely to continue in the third quarter.

"For now we don't see the signs of a recession, but the moderation of growth is obvious. We tried to bring inflation down without creating a recession, which is a very difficult job. So far it has worked out, but we have this weakening of economic growth and we will have to be very careful about the mix of economic policies, which will continue the disinflation without creating a recession", said Isărescu, adding: "The exchange rate helped us. On the one hand, we avoided higher inflation in the first two years after the start of the energy crisis and in the middle of this year, but Romania's risk premium is the highest. And the main factor is the twin deficit situation - the fiscal deficit and the current account deficit still remain high. And hard to put down."

• "The Government and the Parliament must find solutions to bring the deficits to the targets we assumed with the EU"

The governor also emphasized that the Government and the Parliament must find solutions so as to bring the deficits to the targets assumed with the European Union, and the BNR will support any mix of policies in this regard, but they must be realistic.

"The Government and the Parliament must find solutions to bring the deficits to the targets we assumed with the European Union. How will this be done? We support any mix of policies, spending cuts, tax increases that lead to this. But we support what is realistic. I don't see how Romania will be any different than other European countries that reach budget balance with 32-36% revenues from GDP and we do that with 27%. That we will increase revenues through better collection, by reducing evasion, that we also reduce in other ways - this is the duty of the fiscal-budgetary policy, we support any measure, but let it be realistic", said Isărescu.

The NBR report was prepared based on the data available until mid-October, so it does not take into account other elements that appeared later.