Page 78 - SE Outlook Regions 2024

The BNR affirmed the year-end inflation forecast at 7.5% y/y and revised slightly upward the end-2024 projection, from 4.4% y/y to 4.8% y/y, in the latest Inflation Report on November 10, 2023.
BNR governor Mugur Isarescu, introducing the report, added a more cautious note most likely inspired by the ruling coalition’s plans for more public spending and an outstanding pension hike in 2024.
The headline inflation in Romania will remain on its downward path, under BNR’s baseline scenario, except for a short respite in Q1 2024 caused by the fiscal policy. The first-round impact of the new VAT and excise duty regime updated as per the fiscal package effective January 1, is estimated at 0.9 percentage points (pp). However, inflation will return shortly to the downward path and reach 3.3% y/y thus entering the target band at the end of Q3, 2025.
Subdued economic growth below potential (negative GDP gap starting at the end of 2024), lower inflationary expectations and softer pressures coming from the import prices will drag down the CORE2 inflation making it the main contributor to the overall disinflationary process over the entire forecast period.
The inflation scenario sketched by the BNR in its latest Inflation Forecast is subject to positive risks generated by developments in the Middle East, while the global slowdown is a source of pressure in the opposite direction.
It is not a good time to talk about rate cuts, Isarescu said while unveiling the updated Inflation Report on November 10. The worst scenario is seeing inflation picking up just after a rate cut, he said.
Rate cuts will not take place before inflation falls sufficiently low, he announced, stressing that the policy rate is still negative in real terms and the central bank is striving to encourage growth by allowing sufficient liquidity in the market.
The concerns expressed by Isarescu, in contrast to the more moderate Inflation Report that confirms the smooth disinflation scenario, are quite natural amid the visible lack of fiscal discipline and predictability demonstrated recently: the two ruling parties reportedly agreed on a significant rise in public spending in the electoral year 2024 and are close to putting at risk the fragile expectations for fiscal consolidation by promising 40% higher pensions next September.
“Czechia, Poland, Hungary, countries with which we compare ourselves and which also have exchange rate floating policies, none of them have the fiscal-budgetary problem that Romania encounters,” Isarescu said.
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