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December 5, 2022

BNR Governor talks about deflation’s impact

At last, National Bank of Romania (BNR) Governor Mugur Isarescu is talking openly about the deflation that seems to have taken hold in our country. In a speech he gave in Kiev, at the annual IMF/World Bank Constituency Meeting, Isarescu first reminded bankers of their duty to be closer to their clients and to economic and social realities in general. Monetary policy decisions have to be explained to the wide audience in an accessible language, against the backdrop in which the Central Bank is still facing criticism for not lowering the monetary policy interest rate considering that the inflation rate is negative, although future inflationary pressures stemming from the economy’s rapid growth are obvious, Mugur Isarescu claimed.

“Honestly, I understand that the wide audience is not familiarised with concepts such as “economic overheating” or “positive GDP deviation,” but I believe an annual retail sales growth of 20 percent and a 10 percent salary hike are more than eloquent. Still, despite these signs, obvious even for non-economists, that the economy is growing rapidly, we are criticised for not fighting deflation. Recent experience has showed that despite the numerous information offered through a wide spectrum of means of communication, our messages are reaching the wide audience only to a small extent. That is why we have to try to give up on the professional jargon in order to explain to the public the reasons behind the monetary policy decisions in a language as accessible as possible,” the BNR Governor explained in the speech he gave at the annual IMF/World Bank Constituency Meeting.

The Head of the BNR pointed out, again, that apart from the “perfect storm” shown by the deflationary shocks (low prices for energy, foodstuffs and metals, the successive reduction of VAT), inflationary pressures are emerging on the demand side, bearing in mind that the economy is about to grow above its potential, the pressure on the hourly labour cost is ever higher, and the fiscal policy is taking a strong expansionist turn.

The Head of the BNR pointed out that the Romanian inflation rate of -3.25 percent is currently the lowest in the European Union. However, if the first round effect of the VAT cuts adopted in 2015 and 2016 is excluded, the annual inflation rate would be in the ballpark of 1 percent. “Consequently, the negative inflation we are dealing with currently is not generated by a persistent lack of demand. It’s just a temporary situation induced by the aforementioned tax cuts,” the BNR Governor added.


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