Romanian fiscal adjustment plans challenge timeline for interest rate cuts

BUCHAREST (Reuters) – Romania’s central bank saw a window of opportunity with falling inflation to cut interest rates twice and ease some policy restrictiveness, but the bank is now pausing as a pending fiscal correction is the main economic challenge, a bank board member said on Tuesday.

Earlier this month, Romania’s central bank held its benchmark interest rate at 6.50% after two consecutive cuts, saying inflation’s downward path would be more erratic.

With high spending ahead of presidential and parliamentary elections in November and December, analysts said the bank’s scope to cut the benchmark rate further was limited by widening budget and current account deficits.

The European Union state’s widening budget deficit has aggravated Romania’s inflation, which will likely stay above target through 2027, S&P Global Ratings said in its latest ratings review. The bank expects inflation to return to its 1.5%-3.5% target band by end-2025.

Speaking at a financial seminar on Tuesday, central bank board member Csaba Balint said it would be important to see what the budget deficit adjustment plan entailed.

Asked about the interest rate outlook, he said “I believe the general trajectory is downwards. The budget correction would mean a lower fiscal impulse and demand aligned with production capacity, therefore inflation should come down, which would enable us to continue easing monetary policy.”

“However, it is very difficult to anticipate a timeline or the dosage.”

Romania has yet to unveil a 2025 budget, with the coalition government mulling a seven-year timeframe to bring the country’s deficit below the bloc’s 3% ceiling.

The coalition government raised its 2024 consolidated fiscal deficit target to 6.94% of economic output in September, but the country’s independent fiscal watchdog said the shortfall would likely rise to around 8% of economic output.

Analysts and ratings agencies expect tax hikes from 2025.