BUCHAREST (Reuters) -Romania’s central bank nearly doubled its annual inflation forecast for this year on Tuesday, but it expects a return to target in 2026 and will keep interest rates steady for now, Governor Mugur Isarescu said.
The bank expects inflation to be running at 8.8% in December, compared with its previous forecast of 4.6% as tax hikes and higher electricity prices drive up prices.
Inflation should peak at 9.6%-9.7% in September, the bank said, and it forecast the headline rate to then fall to 3.0% by the end of 2026, compared with the 3.4% previously expected.
Earlier on Tuesday, new data – not included in the central bank’s forecasts – showed that annual inflation jumped to 7.84% in July, well above a Reuters poll forecast of 6.40% and the highest level since October 2023.
The surge came after a government-imposed electricity price cap ended in June.
Romania’s two-month-old broad coalition government has also raised value-added tax and excise duties as of this month to help narrow the widest budget deficit in the EU and prevent a ratings cut from the lowest rung of investment grade.
Isarescu said electricity prices and tax hikes will add at least 2 and 4 percentage points respectively to inflation this year. On the demand side, however, he said there were disinflationary pressures.
“We are confident that this time fiscal policy will do its duty by … depressing demand,” Isarescu said. He added the government could avert a recession this year by speeding up its absorption of EU funds.
The central bank held its benchmark interest rate at the EU’s joint-highest level of 6.5% earlier this month and Isarescu said a cut this year – after some previous initial easing – was not possible.
Asked if a rate hike was possible, Isarescu said, “We hope not.”
He added that a rate hike would be risky as monetary policy was partly aimed at avoiding recession risks.
(Reporting by Luiza Ilie; Writing by Jason Hovet; Editing by Hugh Lawson)
