The BNR revised upward the inflation forecast for the end of the year

Mugur Isărescu: "Most of the disinflation is on the side that we can control and we know thatthis will happen because monetary policy has remained countercyclical. As inflation has fallen, wewe have not lowered the monetary policy rate. Practically, we have a sui generis strengthening of the monetary policy".

• "It is not the problem of the deficit as such that is acute, but its dynamics, because we always talk about the decrease, but it is increasing", said Isărescu

The National Bank of Romania (BNR) has revised upward the inflation forecast for the end of this year, to 4.9% compared to the previous forecast of 4%, and estimates inflation of 3.5% for the end of next year, at the limit of the range above the bank's long-term target, according to the data made public yesterday by Governor Mugur Isărescu, during the presentation conference of the "Quarterly Report on Inflation".

The governor stated: "We make the forecast with the certain data we have. We know that a fiscal-budgetary correction will follow, an adjustment in the fiscal-budgetary field that will also lead to an external adjustment. Twin deficits are around 8%, so it is hard to say that the non-government sector contributes much or significantly to the external deficit. The corrections that will be made regarding the public deficit will, of course, also be reflected in the external deficit. We have no firm data on how they will be done, and therefore this forecast is based only on what we currently know. It does not include the fiscal-budgetary correction measures that will be taken next year, depending on which inflation will be higher or lower."

Mugur Isărescu added: "Most of the disinflation is on the part that we can control and we know that this will happen because the monetary policy has remained countercyclical. As inflation fell, we stopped lowering the policy rate. Practically we have a sui generis strengthening of the monetary policy. This contributes to the restriction of core inflation, which we control and which depends on the evolution of demand surplus or demand deficit".

The governor stated that the bank's monetary policy works, in the sense that it restricts aggregate demand. "Of course we have to be careful not to go too far in the negative, which means a recessionary effect. But so far fiscal policy has been expansive enough not to give us much to think about. Fiscal and revenue policy depends on what will be done. I do not enter into this subject; fiscal policy is distributional and redistributive and of course it will be thought of depending on the outcome of the election. That is, it will affect more or less certain parts of the economy and parts of society. Not all fiscal measures are inflationary", said Mugur Isărescu.

The governor also stated that the NBR expects from the Government that will be formed after the elections a credible and coherent program of macroeconomic correction, which will be politically supported and socially accepted, according to which the bank will build its monetary policy.

"We expect a coherent correction program, of course with strong political support because any correction, any adjustment, means a tightening of the belt somewhere. Reducing the external deficit as well as the public deficit means adapting domestic consumption to the level of production. On the other hand, we know very well that not all belt tightening is painful. One can also conceive a tightening of the belt with a healthy diet and then the pain is less and the effect is better. We are waiting for this mix of fiscal-budgetary and income policies according to which we will define the monetary policy", said Isărescu.

According to the governor, the NBR will resume the process of reducing the key interest rate when inflation will decrease in a sustainable manner. "And now we can think about something like that, but it is possible that in the first half of next year, measures will be introduced to push prices up. How could we now reduce interest and then be forced to raise it. We have to wait for those corrective measures to adjust. As inflation goes down and the forecast is clearly down, interest rates will go down," Isărescu said.

The governor also emphasized that the external deficit of 8% is very large, which in the coming period will create strong economic and financial pressures, which will also affect the social and political level. "But the problem of the deficit as such is not so acute as its dynamics, because we always talk about the decrease of the deficit, but it is increasing", said Isărescu.