BUCHAREST (Reuters) - Romania's central bank lowered its annual inflation forecast for this year on Wednesday, driven primarily by an extended government energy support scheme, but said price growth would not return to within its target band by 2024.
The bank now expects inflation to moderate to 7.0% in December, compared with a previous forecast of 11.2%, which was made in November, just before the government extended support. It sees inflation at 4.2% at end-2024, still above its 1.5%-3.5% target band.
"Annual inflation at 4.2% is above the target but reasonable if we look at the geopolitical context in which we live," Governor Mugur Isarescu said. "There are many components we don't control, we don't know how the war will develop, or to what extent energy prices will fall."
The bank expects adjusted CORE-2 inflation, which excludes regulated prices and can be controlled through monetary policy, at 9.8% at the end of this year, driven by larger-than-expected non-food and service price rises.
"The question is whether we should further restrict demand. I think we should know our place, do more good than harm to avoid causing recession that will unbalance other areas," Isarescu said, adding he favoured fine-tuning measures.
He also warned that Romania's current account deficit, which soared to nearly 10% of gross domestic product last year, needed to be corrected gradually, possibly through a weaker currency.
He also said a firmer leu currency would not help lower inflation sustainably. The leu was flat against the euro on Wednesday. Earlier this month, policymakers kept the benchmark interest rate unchanged following a 16-month hiking cycle, joining their central and eastern European peers which had already paused as their economies tipped into technical recessions.
Isarescu said it was not certain the bank's key rate had peaked at 7.00%, although the next rate move would depend on developments.
"When I am asked if we plan to hike further, I answer, it depends on what happens. We have never said that's it, the maximal rate is 7.00%."
He also said a rate cut would not happen before annual inflation falls down to the key rate level.