BNR: Current assessments highlight worsening inflation outlook; a more pronounced increase in next quarter

The current assessments highlight a worsening of the inflation outlook, especially in the middle segment of the forecast horizon, under conditions in which the annual inflation rate is expected to prolong its slow decline in the first quarter of 2026, as in the previous projection, but to record in the following quarter a more pronounced increase than that forecast in November 2025, according to the Minutes of the Monetary Policy Meeting of the Board of Directors of the National Bank of Romania of February 17, 2026."With regard to future macroeconomic developments, the members of the Council pointed out that the current assessments highlight a worsening of the inflation outlook, especially in the middle segment of the forecast horizon, under conditions in which the annual inflation rate is expected to prolong its slow decline in the first quarter of 2026, as in the previous projection, but to record in the following quarter a more pronounced increase than that forecast in November 2025. At the same time, after the steep downward correction that it will experience in the third quarter of 2026 against the background of some base effects, it will resume its decrease on a higher trajectory than previously anticipated, re-entering the target range in the second quarter of 2027 - somewhat later than in the previous forecast. - and remaining in the upper half of the range at the end of the projection horizon. Thus, the annual inflation rate would reach 9.8 percent in June and stand at 3.9% in December 2026, compared to the values ??of 9.2% and 3.7% previously anticipated for the same reference points, respectively, and at the end of next year it would decrease to 2.9%, a level similar to that indicated by the previous forecast for September 2027, the Council members emphasized," the BNR minutes show.Responsible for the rise in the annual inflation rate in the second quarter of 2026 are mainly the base effects that will manifest themselves in the energy segment, as well as the increase in the prices of some goods and the elimination on April 1, 2026 of the ceiling for the commercial mark-up on basic foods, the influences of which will primarily affect the evolution of the exogenous components of the CPI and to a lesser extent the dynamics of core inflation, the Council members noted.According to the BNR, it was observed that the action of supply-side factors will thus regain its inflationary character in the second quarter of 2026, but will become strongly disinflationary again in the following period, amid the exhaustion of the direct effects generated in the third quarter of 2025 by the elimination of the ceiling on the price of electricity and the increase in VAT and excise rates.The balance of risks induced by supply-side factors, however, remains tilted to the upside, the Council members agreed, citing the uncertainties associated with the implications of the expiration on April 1, 2026 of the natural gas price cap scheme for household consumers, but also the possible larger indirect effects of the increase in energy prices, as well as the potential trajectory of the oil price, in the context of current geopolitical tensions.Regarding fundamental factors, it was shown that neutral or very slightly disinflationary pressures are to be expected from them in the near term, given the probable sharp deepening of the aggregate demand deficit in the second semester of 2025, associated with the weakening of consumer demand, but also the time lag necessary for the effects of the negative GDP gap to manifest, as well as the still high dynamics of wage costs in some sectors, which will continue in the first quarters of the current year.The pressures of fundamental factors will, however, increase their disinflationary nature in the second half of 2026, and then remain significantly disinflationary, although less intense than previously anticipated, the Council members concluded, noting that the aggregate demand deficit is expected to increase during this year - against the background of the progress of the budgetary correction - and to narrow only slightly in 2027, reaching considerable values, but lower than those previously forecast.The likely consolidation in 2026 of the improved structure of aggregate demand compared to 2024 was also considered relevant from the perspective of the action of fundamental factors, implying an increased contribution of investments to economic growth to the detriment of consumption, with implications also for the evolution of potential GDP in the future. It was unanimously assessed that, in such a context, the risk that the probable temporary increase in the annual inflation rate in the second quarter of 2026 would affect medium-term inflation expectations and produce secondary effects is significantly diminished, however, requiring careful monitoring of all developments, given the behavior of inflation in previous years.The annual dynamics of core inflation will, however, remain marked until the middle of this year by the transitory effects above expectations exerted by the increase in VAT rates, as well as by the high levels of short-term inflationary expectations, likely to increase the degree of persistence of this inflation component, and in the second quarter of 2026 it will receive the influences of the expiration of the measure capping the trade mark-up on basic foodstuffs, the Council members noted. It was also noted that the anticipated disinflationary effects arising from the deceleration of the increase in import prices will be moderate, including in the context of the evolution of the leu/euro exchange rate, while short-term inflationary expectations will experience a large downward adjustment in the third quarter of 2026, and then will continue to gradually decrease.Under these conditions, the annual adjusted CORE2 inflation rate is likely to decline only slightly in the first half of 2026 and on a path that is noticeably higher than previously forecast, and after the downward correction in the third quarter of 2026 it will gradually decline, falling below the midpoint of the target towards the end of the projection horizon. Thus, it is expected to fall to 4% in December 2026 and to 2.1% in December 2027, compared to the levels of 3.8% and 2.3% previously anticipated for December 2026 and September 2027, the Council members underlined.Regarding the future of the cyclical position of the economy, the Council members indicated that economic activity will continue to feel the effects of budgetary consolidation measures and the high annual inflation rate in the first half of 2026 - primarily affecting the real disposable income of the population - but will then recover and accelerate its growth more clearly in 2027 compared to previous forecasts, mainly due to the influences coming from the use of European funds related to the Next Generation EU instrument and from the revival of external demand. Under these conditions, the aggregate demand deficit will probably continue to deepen until the end of the current year, at a slower pace, including in relation to previous forecasts, and will subsequently narrow slightly, thus reaching considerable values ??over the projection horizon, but lower than those previously anticipated, the Council members indicated.In such a situation, household consumption will register a very modest increase from a historical perspective in the current year, but will again become the majority contribution in 2027, while gross fixed capital formation will remain the main determinant of GDP growth in 2026 and will maintain its significant contribution in 2027, under the conditions of its continued robust growth, amid the attraction and use of a significantly increased volume of European funds, with knock-on effects in the private sector as well, the Council members noted.It was noted that net exports are expected to make a marginal positive contribution to economic growth in 2026, followed by a slightly contractionary impact in 2027, implying a more modest correction of the current account deficit as a share of GDP in the 2026-2027 period than previously anticipated.It will thus remain considerably above European standards, continuing to constitute a major vulnerability, implicitly a source of risks to inflation, the sovereign risk premium and, ultimately, the sustainability of economic growth, the Council members emphasized.At the same time, the BNR notes that uncertainties remain associated with the measures that will likely be adopted in the future in order to maintain the budget deficit beyond the current year on a sustainable downward trajectory and compatible with the Medium-Term Budgetary-Structural Plan agreed with the EC, as well as with the excessive deficit procedure.The Council members also highlighted the significant uncertainties and risks to the outlook for economic activity, implicitly the medium-term evolution of inflation, which come from the external environment, against the backdrop of geopolitical conflicts and global trade tensions, but also in the context of plans to increase spending on defense and infrastructure investments in EU states.Including from this perspective, the Council members emphasized the importance of attracting and making the most of European funds, especially those related to the PNRR, which are essential in the current context for partially offsetting the contractionary effects of budgetary consolidation and geopolitical and trade conflicts at a global level, as well as for carrying out the necessary structural reforms, including the energy transition, but also for increasing the growth potential and strengthening the resilience of the Romanian economy.The Council members unanimously assessed that, overall, the analyzed context justifies keeping the monetary policy interest rate unchanged, with a view to ensuring and maintaining price stability over the medium term, in a manner that contributes to achieving sustainable economic growth.The importance of continuing to carefully monitor developments in the domestic and international environment was also reiterated, allowing the adequacy of the instruments available to the NBR in order to achieve the fundamental objective of price stability in the medium term, while maintaining financial stability.In these conditions, the Board of Directors of the National Bank of Romania unanimously decided to maintain the monetary policy interest rate at 6.50%, to keep the interest rate for the lending facility (Lombard) at 7.50% and the interest rate for the deposit facility at 5.50%. The Board of Directors of the National Bank of Romania unanimously decided to maintain the current levels of the minimum reserve requirements for the liabilities in lei and foreign currency of credit institutions.