A long Middle East conflict could have a severe impact on the economy, declared Mugur Isărescu, governor of the National Bank of Romania, on Monday at the high-level regional conference “The Economist Romania Government Roundtable”, organized by The Economist editorial group.

“As Governor of the National Bank of Romania, I would like to present how we view these developments and how our monetary policy framework is calibrated to maintain stability while supporting sustainable growth. Romania’s economy – interconnected with those in South-Eastern Europe – has made continuous efforts and engagement over the past 20 years to accelerate convergence with the EU; however, it still needs positive policy measures and investments to continue the trajectory of progress and seize the opportunities that have emerged. In recent years, our economy has demonstrated resilience, although the public finance situation is facing the pressure of high budget expenditures from the past. Growth has continued, albeit at a more moderate pace, supported by investment, the absorption of EU funds and a still robust labor market,” Mugur Isărescu said, according to Agerpres.

At the same time, he noted that Romania faces structural vulnerabilities: a persistent current account deficit, fiscal imbalances and sensitivity to external financing conditions. The interdependence between fiscal and monetary conditions underlines that the way forward requires, among other things, gradual and credible fiscal consolidation, continued structural reforms to increase productivity, efficient absorption of European funds, and strengthening institutional credibility.

“Inflation, which peaked under the impact of energy and food price shocks after Covid-19, was on a downward trajectory until last summer, when it resurfaced as a result of supply shocks (energy prices and tax increases) generated by fiscal adjustment measures. According to the latest assessments of the inflation outlook, fundamental pressures on price dynamics continue to require our vigilance. The ongoing conflict in the Middle East poses significant risks – including upward pressures on energy prices, deteriorating economic growth prospects and increasing risk aversion in international financial markets. If the conflict is prolonged, the impact on the economy could be severe. However, fiscal adjustment must continue. It is true that when inflation accelerates, purchasing power erodes; when geopolitical risks increase, cautious saving intensifies. Consumer confidence becomes more fragile and consumption patterns adjust,” said Mugur. Isărescu.

He stated that the National Bank of Romania must maintain a firm position to anchor inflationary expectations and protect financial stability.

“Our decisions are based on a comprehensive analysis of domestic conditions, external developments and risk scenarios, transparently reflected in the published minutes of the monetary policy meetings. In parallel, Romania’s external position and balance of payments data underline the importance of maintaining international investor confidence and ensuring sustainable financing conditions. We have maintained an adequate level of international reserves so that they represent an essential buffer and an anchor of confidence, alongside exchange rate stability in a flexible regime. In this environment marked by volatility and uncertainty, the role of the central bank is not to eliminate uncertainty, but to prevent it from turning into instability. Our monetary policy framework has price stability as its primary objective. However, price stability is linked to financial stability, and these two dimensions raise the challenge of trade-offs: how to act decisively against inflation without excessively restricting economic activity, how to maintain exchange rate stability while preserving its flexibility, and how to support credit intermediation while protecting prudential lending standards,” Mugur Isărescu said.

To manage these trade-offs, he said the NBR relies on a data-driven and forward-looking approach, public communication to anchor expectations, and close cooperation within the National Committee for Macroprudential Supervision, recognizing that macroeconomic stability requires policy coherence.

“In the current global context, coordination at European level is equally vital. As geopolitical tensions intersect with economic policies – whether through sanctions, trade measures or strategic investment programs – central banks must carefully assess the second-round effects on inflation and financial stability. In this context, the National Bank of Romania will continue to act with prudence, professionalism and independence. Our mandate obliges us to look beyond short-term fluctuations and protect long-term stability”, Mugur Isărescu pointed out.