NBR revised on the upside the inflation forecast and on the downside the output gap | NEUTRAL

by cristian.popescu

According to the updated macroeconomic forecasts of the National Bank of Romania (NBR), published within the Quarterly Report on Inflation, released yesterday, the annual pace of the consumer prices would maintain on the downward trend, from 5.1% in Dec 2024 to 3.8% in Dec

2025 (upwardly revised from 3.5%) and 3.1% in Dec 2026. This scenario is supported by the prospects for the slowing-down of the annual pace of the CORE2 adjusted prices, from 5.6% in Dec 2024 to 3.7% in Dec

2025 (upwardly revised from 3.5%) and 2.9% in Dec 2026, given the decline of the inflation expectations, the diminishing pressures from the import prices and the prospects for the output gap to turn negative. In this updated scenario the central bank cut the forecasts for the evolution of the output gap, to negative territory starting Q1 2025, in the context of the fiscal consolidation measures, and restrictive monetary policy (as reflected by the increase of the real financing costs). At the Press Conference the Governor of the central bank signalled the prospects for resuming the interest rate cut cycle in H2 2025 and for increasing flexibility on the FX market, a scenario conditioned on the stabilisation of the political risk perception.

Our view: We forecast the consumer prices (HICP base) to increase by annual average paces of 4.9% in 2025, 4.3% in 2026, and 3.6% in 2027.

The convergence of inflation towards the target interval and the prospects for the adjustment of the twin deficits would increase the manoeuvre room of the central bank, which may cut the monetary policy rate by 1pp in 2025 and 0.5pps in 2026 and 2027. However, this scenario is conditioned on the improvement of the risk perception, which depends on the geo-political tensions and domestic factors, including the political uncertainty and the challenges in terms of sovereign rating | NEUTRAL