Romania’s Inflation Outlook for 2025: Gradual Decline Amid Persistent Risks

Romania’s annual inflation rate continues its slow descent, with the National Bank of Romania (BNR) projecting a gradual return toward its inflation target, despite persistent internal and external risks. The central bank’s latest Inflation Report outlines key developments in inflation, monetary policy decisions, and macroeconomic projections for the remainder of 2025 and into 2026.   The governor of the National Bank, Mugur Isarescu, explained at the presentation of the Inflation Report that this month there was strong pressure on the foreign exchange market, with large, even historic, capital outflows, which were not determined by a single element, but rather an avalanche of negative factors. According to the governor, it all started due to the tensions and public discourse, “often aggressive”, during the electoral campaign, which then gradually deteriorated.   “Then there was the election result (from the first round). After that, the resignation of the Government followed. The alarm signal was the fact that the Ministry of Finance was unable, on the Monday after the elections, on May 5 or 6, to take money from the market and publicly announced this. As a result, we witnessed massive outflows,” Isarescu explained on Tuesday.   The National Bank intervened the day after the first round of the presidential elections “with large amounts, even very large ones.”   “Under these conditions, the exchange rate below 5 lei was impossible to defend, not only because of the loss of reserves, as you say. Although we are not losing reserves. We exchange part of the reserves for lei, we sell foreign currency and buy lei on the market. And, in addition to the exchange rate, the NBR also has to manage financing problems or those related to public spending and payments in the economy,” said Isarescu.   “Consequently, we witnessed massive outflows. The main issue wasn’t the interventions. Let me be clear: the National Bank intervened the very day after the elections, with large, even very large amounts. Those who read trading platforms and know how to interpret them — since some of our interventions are conducted indirectly, through intermediaries, as is common practice for any central bank in certain situations — will recognize this. This was a situation we anticipated, expecting various capital movements.   Any intervention drains liquidity from the market, so no — as I’ve seen it misreported now and during the 2007–2008 crisis — the National Bank did not withdraw liquidity by cutting some liquidity facility. We didn’t do that. But consider this: if you sell one billion euros, you withdraw five billion lei from the market. We don’t, let me say, sell foreign currency for peanuts — we exchange it for lei. And these liquidity withdrawals become quite significant when interventions are large,” explained the Governor of the National Bank of Romania (NBR).   He stated that defending the exchange rate below five lei was impossible.“Not only did we intervene — issues arose concerning market liquidity. And any rational policy cannot pursue two contradictory objectives simultaneously: on one hand, to defend the leu, the exchange rate, and on the other hand, to inject liquidity into the market. In these conditions, keeping the exchange rate below five lei became impossible, not only due to reserve losses — as you put it, although ‘reserve loss’ isn’t the right term, since we don’t lose reserves, we just convert a portion of them into lei.” “A crisis unit was formed, the Ministry of Finance came here, we had discussions, and solutions were found. The depreciation of the exchange rate was thus limited. In situations like this, speculative capital can also pile onto the capital outflow. Meanwhile, liquidity was ensured in the market so that budgetary payments could be made. Among these payments — and I looked at the figures myself during that meeting — were large amounts for pensions. In any case, the exchange rate couldn’t have been maintained, and I think it would’ve looked much worse if it had broken just before the second round of the election, especially if there had been difficulties in making public payments,” Isarescu further said. “The dominant contribution to inflation decline in recent months came from fuel prices. And this downward trend in fuel prices was linked to the correction in Brent crude prices — so, global oil prices. The reduction in these prices led to a favorable variation — meaning a decrease — in domestic fuel prices,” the BNR governor concluded.   Inflation Moderation Slower Than Anticipated   After peaking at 5.14% in December 2024, Romania’s annual CPI inflation fell to 4.86% in March 2025, driven mainly by declines in fuel and tobacco prices. The NBR noted that this disinflation was partially offset by increases in processed food prices and service costs, both influenced by rising commodity prices and wage pressures.   Core inflation (adjusted CORE2) also resumed its downward trend, dropping to 5.2% in March from 5.6% at the end of 2024. However, disinflation has remained moderate overall, with strong wage dynamics and elevated inflation expectations keeping core pressures intact.   Economic Growth Weakens, Investment Outlook Cautious   Real GDP growth slowed significantly in 2024, dropping to 0.8% from 2.4% in 2023. In Q4, household consumption remained relatively strong, but investment contracted sharply, and the current account deficit widened. For 2025, the economy is expected to remain on a modest trajectory, weighed down by fiscal consolidation, an extended electoral calendar, and ongoing global trade tensions.   The output gap turned negative in Q1 2025, estimated at -0.04%, reflecting the fading of excess demand. This gap is expected to deepen to -0.9% by late 2025 and early 2026, contributing to gradual disinflation but also signaling weak economic momentum.   Inflation Forecast: Above Target Until Late 2026   According to the NBR’s updated forecast, inflation is expected to rise slightly to 5.1% by June 2025, before resuming its decline in Q4. However, the CPI will likely remain above the central bank’s target band (2.5% ±1 pp) until Q3 2026, reaching 3.4% by end-2026 and 3.3% by Q1 2027.   The upward revision to the inflation forecast (by 0.8 pp for end-2025) is attributed to stronger-than-expected pressures from core inflation and the anticipated expiration of the electricity price cap in July 2025, which could lead to a 15% hike in electricity prices.   Policy Response: NBR Holds Rates Steady   In its latest meeting on May 16, 2025, the NBR Board opted to maintain the key policy rate at 6.50%, citing persistent risks and high inflation expectations. The Lombard (lending) and deposit facility rates were also held unchanged at 7.50% and 5.50%, respectively.   The NBR reaffirmed its commitment to anchoring inflation expectations and maintaining financial stability, while also emphasizing the need for a balanced macroeconomic policy mix.   Risks and Uncertainties: Energy, Wages, and Global Trade   The report highlights several upside risks to inflation, including: The end of energy price capping schemes; Rising wage pressures, particularly after the minimum wage hike and removal of certain tax exemptions; Elevated geopolitical tensions in Ukraine and the Middle East; Trade protectionism and global supply chain disruptions.   Domestically, fiscal policy implementation remains a key uncertainty, particularly the impact of unannounced future measures needed to meet deficit targets. Failure to absorb EU funds could also undermine growth and external stability.   Conclusion Despite a visible moderation in headline inflation, Romania’s path back to price stability remains uncertain and protracted. The NBR projects inflation will stay elevated through much of 2025, only re-entering its target range in the second half of 2026. With risks skewed to the upside, the central bank maintains a cautious stance, watching both domestic policies and external shocks closely.