History has shown that inflation is the most perfidious economic threat to the well-being of nations, with far-reaching redistributive effects in the social and economic structure, by altering the rationality of economic calculation and via increased inequalities and unfulfilled expectations. Those who have accumulated savings, proving to be both skilful and thrifty, see them eroded by the lower purchasing power, while the indebted sometimes breathe a little lighter. But in the long run, inflation thwarts investment plans and dampens growth. High inflation perpetuated over the years is probably the heaviest brake on prosperity, but also the implacable indication of erroneous public policies, running counter to economic accountability and financial sustainability.
Return to high inflation
Since mid-2025, Romania has re-entered a period of high inflation, recording in fact the highest inflation in Europe at the current juncture. Inflation peaked at 9.9 percent in August and September, sliding to 9.8 percent in October, and we expect it to remain elevated in the coming months as well, yet on a downward path.
The recent jump in inflation is mainly ascribable to administrative, rather than monetary drivers, with the hike in electricity prices in July and the increase in indirect taxes starting August as culprits. Of course, these price developments also incorporate a certain psychological component. Merchants sought ways to protect margins and prepare for any further worsening of market conditions. And consumers respond to the new, higher prices for almost all categories of goods, but especially for services, by considerably and predictably reducing consumption.
The NBR forecast had envisaged already in the summer these inflation peaks, along with the related risks, especially over the short term. These inflationary pressures notwithstanding, the NBR Board decided during 2025 – in its meetings on 8 August, 8 October and, more recently, 12 November – to keep the monetary policy rate at 6.5 percent. The policy rate had been lowered to this level in 2024, from 7 percent previously, given that inflation had entered a slight downward trend in mid-2024, but only temporarily, as we would notice in just a few months.
Several questions, probably justified
This naturally prompts a series of cascading questions or perhaps bewilderments. As early as the first part of 2025, it had become clear that we would see new inflation peaks this autumn. Then, one might ask, why did the NBR not take a proactive approach, in August already, or at least in October or November, by tightening monetary policy? Isn’t this wait-and-see episode too long, and what exactly does it imply?
First, it should be clearly understood that the current wait-and-see approach in monetary policy is by no means a passiveness scenario, but a forward-looking scenario of closely monitoring the macroeconomic and monetary conditions, as the instruments at the central bank’s disposal are entirely on the “decisions table”.
At the same time, understanding and communicating the conditions that must underpin monetary policy decisions are particularly important, especially in the current context, when the contractionary effects of the fiscal adjustment programme are making themselves felt.
Illustrative in this respect are the 0.2 percent GDP contraction signalled for the third quarter and especially the economy entering an area of substantial demand deficit already in 2025, and much more significant in 2026, when the projections show a GDP deviation towards -3.5 percent, i.e. a negative output gap comparable to the situation of the 2009 financial crisis and to the values during the pandemic years.
Adaptability in an increasingly uncertain world
The NBR’s overriding objective is price stability, whose fulfilment, especially today, requires credibility and adaptability.
The whole world has been under the impact of a “constellation of shocks” for several years now. I agree with this description put forth in the contemporary debate on the central bank stage. ECB President Christine Lagarde and former Fed Chair Ben Bernanke acknowledge the unprecedented strength and frequency of shocks, especially on the supply side, which have hit in recent years and continue to pose challenges to the entire global economy. Pandemic, armed conflicts, energy crisis, inflation, trade war, all overlap with demographic, technological or climate-related structural developments.
Amid this whirlwind of transformation, monetary policy must remain credible and effective. Monetary policy strategies need to be carefully analysed and reviewed, and the toolkit adapted accordingly to ensure price stability.
The 2012 “whatever it takes” stated by Mario Draghi, the then President of the ECB, a message reiterated by Fed officials with the freezing of the economy during the pandemic crisis, has become a rather frequently invoked concept, albeit under less dramatic alternatives on the current monetary policy stage.
Today’s world is increasingly uncertain, and this state of affairs also explains the much more volatile nature of inflation. It is obvious that the frequency and magnitude of shocks are thus much higher, with both-way effects. For example, analyses show that firms have tailored their strategies, adjusting prices more often and contributing to inflation volatility.
This is why monetary policy needs to consider risks through contextual and forward-looking approaches, not just through deterministic correlations. A case in point is the energy shock generated by the invasion of Ukraine. The risk scenarios based on complex mechanisms were able to project, through the lenses of specific models, intricate and comprehensive developments, which standard sensitivity analyses fail to adequately capture.
The NBR’s monetary policy options
The NBR’s Inflation Report, as well as the conclusions of the IMF’s Country Report, both published on 14 November 2025, highlight several arguments and provide a forward-looking, medium-term picture of the monetary policy stance. An in-depth understanding of the causes underlying price dynamics and the developments in economic activity, as well as of the regional and global environment, are the elements on the NBR’s information radar, which is complex, but also adaptable.
The option of keeping the monetary policy rate unchanged, i.e. the wait-and-see approach, is a perfectly justified reaction based on the careful assessment of forecasts and the risk spectrum. In fact, to understand this reaction, we should take into consideration all the monetary policy options available to the NBR Board members.
For the time being, a policy rate cut would virtually be inappropriate in terms of the present-day financial reality, at least with regard to short-term risks. Indeed, we are faced with a large demand deficit that will widen further, but a policy rate cut would be a contradiction to the NBR’s mandate and would impact not only the level of prices, but especially the risk of de-anchoring medium-term inflation expectations.
Such an undesirable scenario would affect the central bank’s credibility, which would be subsequently constrained, in order to bring inflation back inside the variation band, to take more sudden and restrictive measures for economic activity than would be normal otherwise.
Thus, it should also be examined why the rise in the reference rate is not justified either. In the absence of unforeseeable shocks, inflation is projected to witness a steep correction, by approximately 5 percentage points in mid-2026, once the effects of fiscal measures pass through into prices, as shown in the graph below.
It is the temporary nature of the current price increase that explains the present status quo option. Specifically, after the policy rate cut in 2024, we have prevented monetary policy from embarking on a volatility rollercoaster with annual see-sawed reactions, i.e. “down-up-down”, which would have disrupted the much-needed credibility and predictability.
Moreover, looking at the decision-making context, we realise that the advance in prices overlaps with the economic slowdown. This occurs after the economic activity lost momentum in 2024, despite the expansionary fiscal policy and the record high budget deficit, the 2.5 percent contraction in investment being accompanied by a 4.7 percent increase in consumption, which was however largely covered by imports.
It is now consumption that is particularly affected, as shown by the 4 percent decline in retail trade in August, only partly offset in September, and the 7.3 percent decrease in the market services, in parallel with the 5 percent drop in real wage earnings. The industry shows no clear signs of recovery either, after the 1.9 percent contraction in 2025 Q3 versus Q2. Construction went down as well, i.e. by 2.1 percent in August (annual terms). At the same time, a monetary tightening would have further weighed on the financial resources of firms and consumers alike.
About principles in price setting
In order to formalise the dynamics of monetary influences, it is worth recalling the equation that describes simply and expressively the quantitative theory of money, M v = P Y. Namely, the balance between money supply and money velocity (turnover), on the one hand, and the level of prices and volume of output, on the other hand, in a cause-and-effect register that must be read only from left to right, that is, from money supply to prices.
In this correlative note, we can invoke the famous conclusion of the empirical research of the monetarist Milton Friedman, winner of the Nobel Prize for Economics in 1976: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”. In the long run, we might add.
For example, in the course of 2024, the growth of money supply in Romania was mainly due to the 27 percent increase in government credit, which is three times higher than that of credit to the private sector. Looking at the breakdown, households’ consumer credit went up by 17.4 percent in 2024, contributing to the higher-than-expected persistence of core inflation. Data for the first three quarters of 2025 point to slower growth of private credit, including consumer loans (12.3 percent). In real terms, credit to the private sector posted even a 2.2 percent decline.
Over time, it is true that many economists have criticised some interpretations of the monetarist theory but also developed related reasoning. In this case, mention should be made of Robert Lucas Jr., one of Friedman’s students at the University of Chicago. Thanks to him, we are now aware of the role of expectations, but also of the limitations to the technical analysis toolkit in the event of major changes in economic policies.
Nevertheless, the practice of present-day monetary policy is further based on certain key principles of the monetarist theory, namely price stability as a primary objective, preference for rules versus discretion, and medium-term orientation, given the transmission lag. The lag may vary from one economy to another, stemming from the complexity of the channels the key rate passes through, via markets and expectations, to the real economy and inflation.
Coming back to the rationale behind the NBR’s decisions, the most important thing to keep in mind is that the current price hike is only short-lived, the main reason being other than a monetary one this time, as mentioned above. Behind the temporary nature of price increases stand the transitory direct effects of administrative and fiscal measures impacting price dynamics over several quarters.
As set out in the graph below, the relevant estimates indicate that almost half of the current inflation rate is ascribable to changes in VAT rates and excise duties and to energy price rises. However, as of mid-2026, the inflation bout triggered by these determinants will drop out of the calculation of the annual inflation rate.
As such, we expect prices to increase at a significantly slower pace after approximately two quarters, under the pressure of strongly pent-up consumer demand, to a 3.7 percent annual inflation rate at end-2026, well below what we currently see.
From a monetary policy perspective, a problematic issue may be the fact that the current price surge however overlaps the still high core inflation, whose monetary drivers cannot be overlooked. In fact, the resurgence of inflation in the final months of 2024 and the persistence of inflationary pressures in the first part of 2025 are developments that also draw attention to the monetary policy implications.
The objective of price stability, seen from the perspective of inflation returning inside the variation band of the target, can be effectively achieved through a gradual, accurately dosed, and consistent implementation of the monetary policy strategy.
Predictability and consistency of monetary policy
Monetary policy works the same way a heavy-lift vessel turns, with the explicit aim of positioning itself in a certain lane. When a course change is decided and the ship’s helm is properly turned, it is only after some time that the ship can be seen steering the intended course. The more troubled the waters, the more difficult the change in the ship’s course. Therefore, in order to put the ship onto the right course, without the subsequent need for urgent and costly corrections, decisions regarding the initiation, strength and duration of the turn are of the essence.
All the more so in these trying times, with rough or turbulent waters, in the vein of the above-mentioned example, with challenges at multiple levels, monetary policy must be predictable and consistent. The move beyond the wait-and-see approach to the next stage, which involves policy rate cuts, will only be made at the same time as inflation decreases in a firm and sustained manner.
Let us recall that the NBR decided, in July and August 2024, to cut the monetary policy rate by 25 basis points each time. Considering the lag in monetary policy transmission as well, the stimulus of that time largely overlapped the inflationary pressures stemming from the expansionary fiscal policy, amid the 2024 election year marked by unprecedented budget spending, if we were to refer to the recurrent pension and wage increases alone.
As evidence, core inflation remained stubbornly high, at over 5 percent, considerably above expectations at end-2024. In fact, core inflation did not show any signs of declining in the first part of 2025 either, before the fiscal measures triggered the recent price hikes, whose magnitude pushed headline inflation close to double-digit levels.
Under the circumstances, the shift to a new monetary policy stage should be carefully and patiently prepared, especially at a time when core inflation also rose to approximately 8 percent in August and remained close to that level in September and October. As a matter of fact, core inflation, with monetary drivers overlapping the rigidity of competitive mechanisms, could be more persistent than envisaged, under the impact of possible wage increases decoupled from productivity.
At the same time, in the context of risks that may suggest a possible technical recession, the lag in the pass-through of monetary policy must be considered, and thus the timing of the decisions becomes crucial. In fact, recent studies on the monetary policy practice after the financial crisis highlight the importance of timing the decisions of major central banks, in order to minimise economic output losses in the fight against inflation.
Let us not forget that, via the dynamics of imports, inflation in Romania also reflects the exchange rate situation. The NBR has the capacity to mitigate the exchange rate volatility and was compelled to do so. At present, however, the general conditions are compatible with a certain stability of the exchange rate, which remains a backbone of confidence in the economic system. Over the medium term, a greater flexibility of the leu would also enhance the economy’s resilience to shocks, yet the condition for a gradual transition depends on the financial factors and the economic environment being explained adequately.
Regaining financial sustainability
The implementation of the fiscal and budgetary adjustment is closely monitored not only domestically, but especially also at European level. Therefore, we must now prioritise financial sustainability. Any rating downgrade would have a negative impact on development prospects. We are glad to see lately several positive acknowledgments of the fiscal and budgetary adjustment measures, which materialised in lower long-term financing costs for the government, i.e. under 7 percent.
Structural reforms are key to regaining financial sustainability and credibility. This requires the proper synchronisation and prioritisation of economic policies so as to deliver on the budget deficit correction. Romania’s commitments as an EU Member State must be taken seriously, just the same as the objective of joining the OECD must be capitalised on as a new anchor for the country’s economic potential. Actually, in the recent IMF-WB meeting in Washington, Director Kristalina Georgieva underlined that the consolidation of public finances and the rebound in sustainable economic growth are global priorities.
Indeed, inflation peaks are genuine challenges to monetary policy and economic resilience. However, even if inflation is temporarily volatile, it does not mean that the reference rate must follow suit in a simplistic activation of this correlation.
Currently, a policy rate increase scenario would be conceptually similar, in terms of response, to the cuts performed in the summer of 2024, when disinflation had not embarked on a clear and sustainable enough path, also given the broad-based expectations for adopting corrective measures through higher indirect taxes.
This is why we must stay as far away as possible from the logic of conjunctural reactions, which can subsequently be invalidated by developments in prices and the economy in general. The not at all simple task of monetary policy is to avoid, in any context and as much as possible, “adding fuel to the fire“ or “rubbing salt into the wound“ in relation to the cyclical position of the economy.
In the period ahead, the persistence of the monetary policy stance and the transition to the next cycle of interest rate interventions need to be carefully calibrated. This is why it is essential that monetary policy decisions favour the sustainable return of inflation inside the variation band of the target. To this end, steps are also taken to communicate carefully the decisions in relation to the relevant economic developments and to the most viable projections we can formulate at the NBR.
Inflation is now high and some risk factors still persist. However, taking into account the transmission lag of monetary policy as well, it is practically unwarranted to change the reference rate in view of the current deviations, which will soon be overcome. This outlook is, in fact, reinforced by the reasonable anchoring of medium-term inflation expectations, as can also be seen from financial analysts’ expectations.
At present, it is essential for Romania to return consistently to financial sustainability, and current efforts to consolidate public finances must be supported politically, as well as by the society itself, in a balanced and sensible manner, in order to regain the necessary economic credibility. This is, in fact, the key ingredient of financial stability.
