BNR affirms its end-2023 inflation rate projection at 7.5%

The National Bank of Romania (BNR) has affirmed its end-2023 inflation forecast at 7.5%, moving up to 4.8% its end-2024 inflation forecast, according to data released on Friday by BNR Governor Mugur Isarescu.In August 2023, the BNR estimated an inflation rate of 7.5% for end-2023 and of 4.4% for end-2024."We have a reaffirmation of the forecast for the end of the year at 7.5%, it is not modified, but there is an upward revision of the trajectory for 2024 amidst legislated increases. We have taken that into account. It is about the impact of the round one of the VAT increases - bringing them to the same level, or switching from three level to only two - and increases in excise duties. The impact is estimated at 0.9 percentage points, which occurs especially in the first quarter of 2024, but later it enters the same trajectory of disinflation and we reach the target interval at the horizon of the third quarter of 2025," said Isarescu, who released BNR's latest Quarterly Report on Inflation.He explained that the main contribution to the decrease in inflation is the reduction of adjusted CORE 2 inflation, which shows that tightening monetary policy and keeping interest rates at a relatively high level for a longer period of time has had some effect and will continue to do so."What is relatively new in this forecast is that we have excess demand in a much faster decline than we saw in the summer months. It is expected to be completely extinguished by the end of next year, as we are anticipating a sustained pace of fiscal correction in 2024 and a continuation of the transmission of the effects induced by the normalisation of the monetary policy here and elsewhere in the world. What risks do we see in these forecasts? Regarding the trends in domestic demand, we do not see inflationary risks. As far as the impact of the prices of raw materials, of intermediate and finished goods due in particular to the geopolitical tensions in the Middle East is concerned, we see upward risks. Tax and income policies are risks in both directions. Some, such as measures to increase taxes, which translate directly into prices by raising prices (...) but achieving the budget deficit objectives considered by the government, leads inflation down. And on the labour market from our point of view, taking into account the election year, the risks are to push the price increase upwards, to amplify the price increase," said Isarescu.On Friday, Isarescu presented the latest Quarterly Report on Inflation, which was analysed and approved on Wednesday by the Board of Directors of BNR.