The National Bank of Romania (BNR) provided few insights into whether the monetary easing cycle would begin in May at its board meeting on April 4, while keeping the monetary policy rate at 7% in line with the consensus expectations.

The annual adjusted CORE2 inflation rate continued to decrease in the first two months of 2024, albeit at a relatively slower pace, falling to 7.6% in February 2024, from 8.4% in December 2023.

The annual inflation rate will decline over the following months, after starting in March, on a slightly higher path than that shown in the February 2024 medium-term forecast, the BNR said in its press release, outlining a long series of uncertainties and risks associated with the inflation outlook. 

A second consecutive month of disinflation in March thus does not seem a sufficient condition to create the circumstances for the beginning of the rate-cut cycle in Romania, for a multitude of reasons that are both domestic (very high fiscal uncertainty) and external (regional but also global monetary stance, among many others). The BNR mentioned medium-run factors such as the future fiscal corrective measures (largely expected for 2025) under the excessive deficit procedure to capture the multitude of risks that may arise. 

Further deferring the rate-cut cycle — that already seems of a smaller magnitude than initially expected at the end of last year — until after the May policy meeting is an increasingly reasonable option for the BNR, unless some unexpected triggering factors occur in the meantime.

The central bank expects the annual inflation rate to decline further over the following months, primarily due to base effects and downward corrections of agri-food commodity prices, as well as amid the deceleration in import price growth and the gradual downward adjustment of short-term inflation expectations. A long list of factors that might impact the inflation trajectory follows, though.

Uncertainties and risks to the inflation outlook stem from the fiscal measures implemented recently for underpinning the budget consolidation process (upward risks), as well as from the measure to cap the mark-ups on basic food products extended until end-2024 (downward risk), but also from the evolution of crude oil prices (upward risk).

Moreover, heightened uncertainties and risks are associated with the future fiscal and income policy stance, coming from the additional fiscal and budgetary measures that might be implemented in the future to carry on budget consolidation, inter alia amid the excessive deficit procedure and the conditionalities attached to other agreements signed with the European Commission, according to the the BNR. The central bank also mentions wage dynamics in the economy as a source of concern.

Uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, also continue to arise, among others from the war in Ukraine and the Middle East conflict, but also from the economic performance in Europe, particularly in Germany.