Central bank governor: A prolonged Middle East conflict could have a severe impact on the economy

 A prolongation of the conflict in the Middle East could have a severe impact on the economy, said Mugur Isarescu, Governor of the National Bank of Romania, on Monday at the high-level regional conference 'The Economist Romania Government Roundtable', organised by The Economist Group.'As Governor of the National Bank of Romania, I would like to present how we view these developments and how our monetary policy framework is calibrated to maintain stability while supporting sustainable growth. Romania's economy - interconnected with those of South-Eastern Europe - has made sustained efforts over the past 20 years to accelerate convergence with the EU; however, it still requires sound policy measures and investment to continue its path of progress and to capitalise on emerging opportunities. In recent years, our economy has demonstrated resilience, although public finances are under pressure from previously high budgetary expenditure. Growth has continued, albeit at a more moderate pace, supported by investment, the absorption of EU funds, and a still robust labour market,' said Mugur Isarescu.At the same time, he noted that Romania faces structural vulnerabilities: a persistent current account deficit, fiscal imbalances, and sensitivity to external financing conditions. The interdependence between fiscal and monetary conditions highlights that the way forward requires, among other things, gradual and credible fiscal consolidation, continued structural reforms to boost productivity, efficient absorption of European funds, and strengthened institutional credibility.'The ongoing conflict in the Middle East generates significant risks - including upward pressure on energy prices, a deterioration in economic growth prospects, and increased risk aversion in international financial markets. If the conflict is prolonged, the impact on the economy could be severe. Nevertheless, fiscal adjustment must continue. It is true that when inflation accelerates, purchasing power erodes; when geopolitical risks rise, precautionary saving intensifies. Consumer confidence becomes more fragile, and consumption patterns adjust,' said Mugur Isarescu.He stressed that the National Bank of Romania must maintain a firm stance to anchor inflation expectations and safeguard financial stability.'We have appropriately maintained the level of international reserves so that they serve as an essential buffer and an anchor of confidence, alongside exchange rate stability within a flexible regime. In this environment marked by volatility and uncertainty, the role of the central bank is not to eliminate uncertainty, but to prevent it from turning into instability. Our monetary policy framework has price stability as its primary objective. However, price stability is linked to financial stability, and these two dimensions create the challenge of trade-offs: how to act decisively against inflation without excessively constraining economic activity, how to maintain exchange rate stability while preserving its flexibility, and how to support credit intermediation while safeguarding prudent lending standards,' said Mugur Isarescu.To manage these trade-offs, he added that the National Bank of Romania relies on a data-driven and forward-looking approach, public communication to anchor expectations, and close cooperation within the National Committee for Macroprudential Oversight, recognising that macroeconomic stability requires policy coherence.'As geopolitical tensions intersect with economic policies - whether through sanctions, trade measures, or strategic investment programmes - central banks must carefully assess second-round effects on inflation and financial stability. In this context, the National Bank of Romania will continue to act with prudence, professionalism, and independence,' Mugur Isarescu concluded.(Photo:https://en.wikipedia.org/)