Romania Set to Deliver First Cut in Three Years

(Bloomberg) -- Romania is poised to deliver its first interest-rate cut in three years after a slowdown in inflation, even as policymakers keep a close eye on price risks stemming from government spending.

Most Read from Bloomberg

After maintaining the key rate at 7% since early last year, most economists in a Bloomberg survey expect the National Bank of Romania to cut it by a quarter of a percentage point to 6.75% on Friday. Only three of 20 economists see no change.

The nine-member board led by Governor Mugur Isarescu has maintained a cautious approach to monetary policy as Romania battles one of the highest inflation rates in the European Union and a budget deficit set to exceed 5% of economic output this year.

Inflation slowed more than expected in May, to 5.1% from a year earlier, to the lowest level since 2021. But the central bank projects price growth to remain above its target range until at least 2025. Wage growth, which has remained in the double digits, has also complicated decision making.

“Inflation dropped much faster than the central bank forecast, which should support the first rate cut,” said Ciprian Dascalu, a Bucharest-based economist at Erste Group Bank AG.

Poland, Hungary and the Czech Republic have already cut borrowing costs several times over the past year and are now moving into a wait-and-see approach amid inflation risks.

For Romania, fiscal risks remain a top concern as the government may resort to tax increases after this year’s elections to tame the budget shortfall.

The Black Sea country is scheduled to hold presidential and general elections later this year, potentially adding to spending pressures.

--With assistance from Barbara Sladkowska.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.