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Isarescu, asked about the timing of this year's key interest rate cut: It might not come
The moment for the reduction of the key interest rate might not come this year, but if inflation for May is dropped, then the membres of the BNR board analyse the data, stated on last Wednesday the governor of the National Bank of Romania, Mugur Isarescu.
"They might not come. We're not saying. Mind you, when I said in February that it was two months of falling inflation I used another word, at least. And many people took out at least. I said at least two months of falling inflation. So I didn't say that immediately in May, after two months, we cut interest rates. That's how it is now. In fact I even asked a member of the Council to come out on TV and say: hey, the governor said at least two months. We are not doing forward guidance for you. You know how much talk there is in the world, the National Bank's policy is rather data-dependent. We are information-dependent, data-dependent. Not only on internal but also on external data. In addition to bringing inflation down without creating recession, we prefer inflation to come down slowly but without a rebound. That is our preference. It is not easy. We know that in Hungary there was a rebound. From the data we have in Poland it might be in August. That's why they have also stopped. So we prefer it to be slower. On your language slowly but surely. Let's be slower but sure to reduce inflation. And the time when the Board of Directors, in its wisdom, taking several factors and listening to several opinions to make the decision, will decide this, it may indeed be neither July nor August. We are still discussing, looking at dates. If the May inflation, which will be published in June, will be low, I don't think the Council members will be reluctant to look more carefully at the data," Mugur Isarescu said at the conference presenting the Inflation Report, when asked if it was possible that the time for cutting monetary policy interest would not come this year.
During the conference he explained which were the reasons for which the National Bank of Romania has not taken the decision to cut the monetary policy interest.
‘And now we are trying to answer the question why the other countries started to drop the monetary policy rate and we didn’t. As in their case helping the inflation, the dropping of the inflation, was quicker than in our case, and, consequence, they reached the inflation under the rate of interest faster and they have a real rate of the monetary policy interest, ex post of course, that’s how e calculated it, we don’t know exactly what inflation will be in the future, almost 3% in the Czech Republic, over 3% real interest rate in Poland, almost 4% in Hungary, while in Romania only with the last two price decreases we have a real monetary policy interest rate’ said Mugur Isarescu.
He stated that the subject has been under discussion but the classic structure of the monetary policy has changed over the last ten years. The BNR governor said that we had a period of deflation, when fiscal repression was used, and then, when the pandemics came and they tried to avoid recession and avoid the negative effects negative interests were used as well.
Mugur Isarescu mentioned that there are discussions all over the world about when and how much the monetary policy interest must be reduced after inflation starts to get down.
"We are also in this discussion. We now have ex post an actual monetary policy interest rate and we are thinking about the optimal time when we will take that decision. So it's about finding the optimal moment. So far we've been looking for that combination of monetary policy looking , realistically we say, at what we have in fiscal policy, government policy, to bring inflation down without creating recession. And we explained that monetary policy stance, tough, after all. As a rule, a strong, restrictive monetary policy has recessionary effects, but we have said so several times in public that for Romania to have a recession with a large fiscal deficit, which you can see is very difficult to correct, is not the optimal solution. On the contrary, a recession worsens the fiscal situation and consequently has negative effects on inflation", explained Mugur Isarescu.
Similarly, he mentioned that the decision regarding the inflation dropping must be made without getting into recession,
"I hear talk in public that sir, the problem is that the government is borrowing. What does it mean if the Government couldn't borrow and wouldn't fund the deficit? It means not only financial crisis, it means economic crisis, social crisis, political crisis. We, and I in particular, experienced these events in the 1990s. We didn't have any foreign debt then, or it was very small, and we were desperate to find money to finance the deficit, which was smaller anyway. Those were extremely difficult years. So the solution is not to stop financing the deficit. That would be a terrible shock to the economy and to the country. The solution is to reduce the fiscal deficit both on the expenditure side and on the revenue side, on both sides. These are the choices that the government has to make and you notice that they are very hard to make. I stop here. We are still trying to bring inflation gradually down, we are not rushing the economy. We don't apply the brakes brutally on monetary policy so as not to create a recession because that's what we need in an election year," said Mugur Isarescu.
The National Bank of Romania (NBR) has revised upwards its inflation forecast for the end of this year to 4.9% from 4.7% and expects it to reach 3.5% by the end of 2025, according to data presented on Wednesday by NBR Governor Mugur Isarescu.
The Governing Council of the National Bank of Romania decided earlier to keep the monetary policy interest rate at 7% per year.