Stagflationary Pressures and Energy Costs
The central bank’s rationale highlights a distinct tension between inflationary risks and slowing economic activity, a combination often associated with stagflationary dynamics. According to the NBR’s latest forecast, the annual inflation rate is expected to rise in the second quarter of 2026, surpassing previously projected levels. This upward pressure is primarily attributed to the anticipated effects of rising fuel prices, which are being driven by sharp increases in oil and natural gas costs amid the ongoing conflict in the Middle East.
These energy-related costs are set to compound unfavorable base effects in the energy sector during the same period. Additionally, the NBR points to the impacts of the liberalization of the natural gas market for non-residential consumers and the subsequent removal of caps on markups for staple foods as contributing factors to the near-term inflationary spike. The central bank warns that these developments, combined with the global energy crisis, generate significant uncertainties regarding the outlook for economic activity and, by extension, the medium-term evolution of inflation. These risks affect consumer purchasing power, business profits, and the perception of regional risk, which in turn influences financing costs.
Fiscal Consolidation and Demand Deficits
While inflation is expected to rise in the short term, the NBR projects a substantial downward correction in the annual inflation rate in the third quarter of 2026. This correction is expected as the direct effects of the removal of the electricity price cap, along with increases in VAT rates and excise taxes, fade. Following this peak, inflation is forecast to gradually decline, returning to within the target range by the third quarter of 2027. This disinflationary trend is driven by fundamental factors, particularly an aggregate demand deficit that deepened more than expected in the fourth quarter of 2025 and is projected to deepen further in the first half of 2026.
This deepening demand deficit is occurring against the backdrop of progress in fiscal consolidation. However, the NBR notes that the current domestic political context introduces heightened uncertainties regarding future measures aimed at continuing fiscal consolidation beyond the current year. These measures are aligned with the medium-term budgetary and structural plan agreed upon with the European Commission and the excessive deficit procedure. The central bank emphasizes that the full absorption and utilization of European funds, particularly those from the National Recovery and Resilience Plan (NRRP), are essential. These funds are viewed as critical for partially offsetting the contractionary effects of fiscal consolidation and the Middle East conflict, while also facilitating necessary structural reforms, including the energy transition.
Market Expectations and Future Outlook
The decision to hold rates aligns with market expectations. Austrian banking group Erste had previously forecast that the NBR would keep the key rate at 6.50% at the May 15 meeting. The central bank’s stance suggests a cautious approach, prioritizing stability in an environment where the interplay between energy shocks, fiscal policy, and global geopolitical tensions creates a volatile economic landscape.
The next scheduled meeting of the NBR’s Board of Directors on monetary policy is set for July 8, 2026. Until then, policymakers will likely monitor the materialization of the projected inflation spike in the second quarter and the depth of the demand deficit, adjusting their strategy as new data on consumer prices and economic activity becomes available. The resolution of the Middle East conflict and the pace of EU fund absorption remain key variables that could significantly alter the trajectory of Romania’s economic recovery and inflation path.
