Romania braces for longer high-rate spell

Romania is poised to keep borrowing costs unchanged as a fresh oil shock clouds the inflation outlook and leaves policymakers wary of loosening monetary conditions too early. The National Bank of Romania is widely expected to leave its benchmark interest rate at 6.5 per cent, preserving one of the European Union’s highest policy rates while consumer prices remain far above target and fiscal strains continue to weigh on confidence.

The expected decision reflects a difficult balancing act for Governor Mugur Isărescu and his board. Price growth in Romania has eased from last year’s peaks, but it is still running at close to double digits, well above the central bank’s inflation target band. February consumer inflation slowed to about 9.3 per cent from 9.6 per cent in January, offering some relief, yet that moderation came before the latest jump in crude prices linked to wider geopolitical tensions and higher fuel costs across Europe.

That rebound in oil has altered the near-term policy picture. Rising energy prices threaten to feed through into transport, food distribution and household bills, making it harder for the central bank to argue that inflation is on a smooth downward path. For a country already grappling with elevated wage pressures, tax-driven price increases and fragile household purchasing power, any renewed energy shock risks delaying the return to more stable price conditions.

Romania’s monetary stance has therefore become less about supporting growth and more about preventing another inflation flare-up. Economists surveyed by international media ahead of the policy meeting have broadly converged on a hold, suggesting that rate cuts are off the table for now even as the wider economy shows signs of fatigue. The central bank has kept the benchmark at 6.5 per cent through a long sequence of meetings, preferring caution over stimulus as external risks have multiplied.

That caution is rooted not only in energy markets but also in Romania’s wider macroeconomic vulnerabilities. The economy slipped into a technical recession at the end of last year, according to reporting from Bucharest, underscoring the pain caused by tighter fiscal and financial conditions. At the same time, the government is trying to bring down the bloc’s largest budget deficit after a gap of more than 9 per cent of gross domestic product in 2024. The budget for 2026 targets a deficit of 6.2 per cent, but investors remain sensitive to any sign that the adjustment could slip.

This combination of weak growth and stubborn inflation has placed Romania in an uncomfortable position familiar to many emerging European economies, but more acute in Bucharest than elsewhere. Unlike euro area states, Romania must manage its own currency, debt costs and inflation expectations while also convincing markets that fiscal correction will remain on course. That helps explain why policymakers are reluctant to ease rates even as domestic demand softens.

The broader European backdrop also matters. Euro area inflation has started to edge higher again, with energy playing a bigger role after the Middle East conflict pushed fuel costs upwards. That has made central banks across the region more cautious. For Romania, where inflation is already far above euro area levels, the margin for dovish signalling is even narrower. Any suggestion of an early rate cut could pressure the leu, complicate debt issuance and add to imported inflation.

Households and businesses are already feeling the squeeze. Higher rates have raised financing costs for mortgages, corporate borrowing and state debt, while food and services inflation continue to erode real incomes. Yet the central bank is likely to judge that the cost of holding steady is still lower than the risk of easing into another price surge. Fuel tax measures and state support may soften part of the blow, but they do not remove the underlying inflation risk created by expensive energy.

Investors will also watch the tone of the bank’s statement for clues on what comes next. Any acknowledgement that oil prices are likely to delay disinflation would reinforce expectations that Romania could stay on hold longer than previously thought. By contrast, a stronger emphasis on recession risks might be read as an attempt to keep open the possibility of cuts later in the year, provided energy pressures ease and fiscal discipline holds.