Isărescu: "We are trying to bring inflation down gradually, without suddenly disrupting the economy"

The National Bank of Romania is trying to gradually reduce inflation without disrupting the economy and creating a recession, Governor Mugur Isărescu said yesterday, during the conference where he presented the "Quarterly Report on Inflation".

The governor declared: "I hear discussions in public that the problem is the fact that the Government borrows. But what would it mean if the Government could not borrow and would not finance the deficit? It would mean not only financial crisis, but also economic crisis, social and political crisis. We experienced these events in the 90s, when we had no external debt or it was very small and we were desperate to find money to finance the budget deficit, which was smaller anyway. They were extremely difficult years".

Mugur Isărescu added: "The solution is not to stop financing the deficit. This would mean a terrible shock for the economy and for the country. The solution is to reduce the fiscal deficit on the expenditure side and on the income side. These are the Government's options and notice that they are very difficult to do. We are still trying to bring inflation down gradually, we don't shock the economy, we don't brutally press the brakes, on the monetary policy, so as not to create a recession because we still need that in an election year".

The governor emphasized that a recession for our country, in the conditions of a large budget deficit and which is very difficult to correct, "is not the optimal solution", but on the contrary: "A recession worsens the fiscal situation and, as a consequence, has negative influences and on inflation".

However, Isărescu mentioned that the BNR does not see a recession likely. "The risk was for the first quarter. All indicators with prognostic power show a recovery, especially consumption", said Isărescu.

The NBR revised upward the inflation forecast for the end of this year to 4.9% from 4.7% previously and estimates that it will reach 3.5% at the end of 2025. In April, the Consumer Price Index (CPI) moderated its annual growth to 5.9% in April 2024, from 6.6% in the previous month, according to INS data.

"We have a downward trajectory of inflation, somewhat less pronounced than in the February projection. Inflation is going down gradually, not suddenly, and somewhere at the end of 2025, the beginning of 2026, it will enter the band (n.r. the range of 3.5% - 1.5%. It's a bit slower than we previously forecast, and this reduction in headline inflation is mainly driven by the core inflation component, which is good. It shows that monetary policy is working, too tight, but we don't let it go too hard to have inflationary effects. We are trying that combination to bring inflation down without creating a recession," said Isărescu.

The Governor stated that the BNR will start reducing the monetary policy interest "at the right time", but did not indicate a period or a calendar of the countries' rates. "Our orientation is data dependent," Isărescu said.

At the beginning of this week, the Board of Directors of the National Bank of Romania decided to maintain the monetary policy interest rate at the level of 7% per annum, as well as maintaining the interest rate for the lending facility (Lombard) at 8% per annum and the interest on the deposit facility at 6% per year.