BNR’s new base scenario indicates an 8% drop in GDP

Romania’s central bank revised the inflation forecast downward on Thursday, to 4.3 percent for 2009 from 4.4 percent, and to 2.6 percent from 2.8 percent for 2010. And this revision of the inflation prognosis was made based on a new scenario regarding this year’s economic decline: 8 percent, compared to the previous forecast of 4.1 percent.

“We are talking about a contraction similar to that we derived from the talks with the representatives of the International Monetary Fund and the European Union, namely, an approximate eight percent economic decline for 2009. Thus, the eight percent drop becomes the base scenario,” Popa added. Practically speaking, this statement confirms what the corporate environment had forecast some time ago. On Wednesday, another member of the central bank, Lucian Croitoru, Advisor to BNR Governor Mugur Isărescu, said that the real economy has already prepared itself for an economic decline of at least 8 percent. Croitoru added that many companies have adjusted their business strategies starting from the possibility that gross domestic product will register a decline higher that the government’s forecast, of 4.1 percent. And this is reflected in the decisions of many companies and businesspeople, who opted for postponing their investments.

Nevertheless, the revision of the inflation forecast also has a negative side, according to some financial analysts. The positive effect, of the tempering of inflation, is based on a negative factor. “A possible moderation of inflation is based on the decline in demand, in consumption, which is also visible in the possible contraction of the economy to eight percent. However, we do not see even the possibility that inflation will meet the central bank’s prognosis. We see an inflation rate of 6.3 percent this year, and of 5.5 percent in 2010,” the Senior Economist of ING Bank Romania, Vlad Muscalu, said.

Inflation climbed 0.2 percent in June compared to May, considering the rise in prices for non-foodstuffs and services and a slight drop in prices of foodstuffs, while the annual rate fell compared to the previous month, to 5.86 percent from 5.95 percent. Besides the change in the inflation forecast, Governor Isărescu also referred to other economic indicators. Thus, the official said that the current account deficit and short-term foreign debt registered a visible improvement, which led to the stabilization of the exchange rate. “The economic fundamentals that led to the reduction of Romania’s rating and pressures on the exchange rate registered an obvious improvement. More specifically, the stability of the exchange rate is based on the improvement of Romania’s external economic fundamentals,” the Governor added.