The NBR must choose: save the economy or stop inflation. As in politics, he will choose the lesser evil

Today, the 9 members of the BNR board meet before lunch with the experts of the Monetary Policy Committee (CPM) and with several other directors from the National Bank, to discuss what decision to make on Friday: will they increase the interest rate, decrease it or leave it at the current level of 6.5%? Your bank rate, the euro exchange rate, even the price of the food you buy in the supermarket depends on their decision.

Dorina Antohi, who heads the Monetary Policy Directorate, will this morning present several documents to the management of the National Bank, documents in which the progress of the economy is described from a macro- and micro-economic point of view.

The most important document, however, is the one in which the 9 are presented with the scenarios regarding the monetary policy decision they are about to make. In short: what will happen to the economy if the 9 decide to raise the key interest rate or lower it. For now, experts are unanimous in saying that under the given conditions, the interest rate will remain unchanged.

The monetary policy committee consists of 13 members and is headed by the governor of the BNR. After meeting today, the BNR board meets again on Friday to make the final decision.

As a rule, Dorina Antohi presents two or three detailed scenarios, each with its advantages and disadvantages.

The 9 listen attentively to the explanations of the head of the Department and take notes. Then they sit and analyze.

On Friday, after the BNR board climbs into the elegant Council room led by the Governor, the 9 will discuss the analyzes with which they have already become familiar.

Sometimes, Mugur Isărescu states his point of view from the beginning of the meeting. Most of the time, however, he prefers to speak at the end, after listening to everyone. And finally, it's time to vote. We will find out the result of the vote on Friday at 3 p.m.

Recession has become the default scenario

The recent overlap of crises (energy, political) further eroded an already fragile confidence environment, while economic activity was already in decline (GDP in Q1 2026 was down 1.7% year-on-year), an internal BRD report shows.

The levers that could have supported a marginally positive growth, note the authors of the report – external stability, the continuity of reforms alongside the correction of imbalances and the absorption of PNRR funds – have progressively weakened or become uncertain. At the same time, the contraction in private consumption is intensifying, investment decisions are being postponed and major trading partners are facing their own economic difficulties.

Consequently, the question is now the magnitude of the contraction, rather than its probability. “We believe that the adjustment recorded in Q1 2026 could represent the midpoint of the range associated with the GDP correction in 2026,” note the authors of the document.

Inflation to stabilize in the 10%–13% range in the second quarter of 2026

We recall that inflation is on an upward trajectory, driven by the spillover effects of the energy shock, exchange rate depreciation and persistent structural weaknesses.

“Inflation is likely to stabilize over a range [10%–13%] during Q2 2026, followed by a gradual moderation in the second half of the year, eventually returning to single-digit levels. This expected deceleration will be supported by the fading effects of tax increases and energy price liberalization initiated in mid-2025,” BRD economists say.

Even before the outbreak of the conflict in Iran, they had expressed reservations about the strength of the disinflation process, projecting an inflation rate at the end of the year slightly above 5%. Now, their expectations imply an inflation rate at the end of 2026 in the range of 6.7%–7.2%.

The National Bank of Romania will keep the monetary policy rate unchanged this year

It is likely that the National Bank of Romania will keep the monetary policy rate unchanged this year, BRD officials explain. The arguments for an increase in the interest rate – a hypothesis also confirmed by an adviser to the Governor in a discussion with HotNews – depends on internal and external developments, as well as on the monetary policy position of the main central banks.

If exchange rate pressures intensify, liquidity conditions in the banking system may tighten, which could lead to an upward shift in interbank rates.

The new comfort range of the exchange rate

BRD expects a relative stabilization of the EUR/RON exchange rate in the interval [5,10–5,20]although temporary increases cannot be ruled out.

More extreme scenarios circulated recently – such as an exchange rate of 6 or even 7 RON for one euro – seem extremely improbable, experts claim.

BCR: we expect the BNR to keep interest rates unchanged throughout 2026

“Given current domestic macroeconomic conditions and the external context, we expect the NBR to keep interest rates unchanged throughout 2026, with the first rate cut now expected in the 2nd quarter of 2027. We have revised our outlook in response to a higher expected inflation trajectory and recent leu depreciation pressures. Given the weak economic growth outlook, we believe that increases rates are unlikely in the absence of additional shocks. However, episodes of currency depreciation could lead to tighter liquidity management, especially since the effective monetary policy rate is currently anchored at the deposit facility level of 5.50%,” BCR also said in an analysis sent on Wednesday.

What would it mean for the NBR to increase the interest rate?

If the BNR (National Bank of Romania) were to increase the monetary policy interest rate, this would trigger a chain of effects in the economy. All other interests in the economy revolve around it.

How interest rate rises, inflation stops:

1. Loans are becoming more expensive

Commercial banks are financed more expensively from the NBR, so they will increase the interest rates on loans for the population and companies. More expensive credit means people will borrow less, spend less, leading to lower demand and downward pressure on prices

2. Saving becomes more attractive

Interest on deposits increases (of course, with a certain delay of several months). People will prefer to put the money in the bank instead of spending it which reduces the demand in the economy.

3. Leo appreciates (potentially)

Higher interest rates attract foreign capital, which leads to higher demand for lei and that helps strengthen the lei. Imports become cheaper and therefore imported inflation falls.

4. Investments are tempering

Firms find it harder and more expensive to borrow, causing development and expansion projects to be delayed. Less economic activity also means less inflationary pressure.

The costs of this policy:

• Slower economic growth. Less credit means less investment and consumption
• The unemployment rate may rise slightly
• Public debt is getting more expensive – the state also borrows more expensively

• Indebted companies suffer – higher rates on loans with variable interest
• The real estate market is cooling – mortgage rates are rising, housing demand is falling

What would it mean for the BNR to lower the interest rate?

The effect is exactly the opposite of an increase – a decrease in the policy rate stimulates the economy, with the risk of fueling inflation.

Transmission mechanism:

1. Loans are getting cheaper. The NBR lends to the banks more cheaply, and the banks lower the interest rates on loans. Therefore, the population and firms borrow more easily, spend and invest more. In short, demand in the economy is increasing.

2. Saving becomes less attractive Interest on deposits falls, so people prefer to spend or invest their money instead of keeping it in the bank. That means increased consumption and greater economic activity.

3. Leo can depreciate. Lower interest rates also make foreign capital go to more profitable markets. The leu risks depreciating, imports become more expensive and imported inflation increases.

4. Investments accelerate Companies can borrow more cheaply. New projects become profitable leading to more jobs, higher wages and more consumption.

Main benefits:

• Faster economic growth
• Lower unemployment
• Public debt becomes cheaper – the state borrows more easily
• The housing market is heating up – mortgage rates are falling, housing demand is rising
• Indebted companies are breathing – rates on loans with variable interest are falling

The risks:

• Inflation may accelerate – more consumption and investment = more pressure on prices
• The depreciation of the leu makes imports more expensive (energy, consumer goods, raw materials)
• Speculative bubbles – cheap money can artificially inflate asset prices (real estate, stock market)
• External imbalance – imports grow faster than exports, the trade deficit deepens