Isărescu: Some reductions in food prices will appear / Fiscal adjustment is essential, although it is neither politically nor socially simple

Some declines in food prices will occur, as some prices are seasonal and there could be discounts on oil, for example. “But we are almost certain that there will be no more big price increases”, said the governor of the National Bank of Romania, Mugur Isărescu, on Friday at the presentation of the Quarterly Report on Inflation.

We live in an inflationary world. In 1976, you walked into a McDonald’s restaurant in the US with a dollar and after you had a BigMac, a juice and a cherry pie, you were left with 20-30 cents. Now, you can’t go to McDonalds without $10, the governor said.

What else did Mugur Isărescu say:

• The perception of the population does not overlap perfectly with the consumer price index. The index is calculated according to European and validated statistical norms.

• We see two risks regarding inflation: wage demands from the labor market – but we hope they remain within reasonable limits and external risks. Let’s see what will happen with the price of oil, Isărescu said.

• The fiscal adjustment must be done, it is essential. The problem is how you discuss it with society.

• Banks have liquidity. Being more cautious is a normal reaction. We have tightened monetary policy, but lending will continue albeit at a more subdued pace.

• We have all the public signals that both the FED and the ECB will raise interest rates. And, as I recommended in 2008-2009, I recommend avoiding loans in currencies other than the one in which you receive your salary.

• Inflation of this category, in which we have entered, there is no way to fight it quickly. The fight against inflation takes longer. Before, when something took a long time, they said “patience and tobacco”. I, not being a smoker, could not recommend this. So I recommended lime tea. It was an unfortunate expression.

• We pressed the brake (inflation) very carefully, so as not to shock the economy. The data show that we will have economic growth this year as well. We managed not to put the economy into recession.

• In our country, inflation was rather on costs, not necessarily on demand.

• If European money is attracted, investments will increase and we will have demand on the less inflationary side.

• We have a slower deterioration of the deficit, especially in Q4, and a decrease in the deficit at the beginning of the year.

• Inflationary expectations have softened noticeably, the governor also states in the May Report.

• We haven’t been champions in the inflation rate for almost a year or so. We are heading towards the middle of the platoon. Inflation in Romania is currently lower compared to 4 countries that are in the euro zone, which shows us that if you are in the euro zone, you have not automatically solved the inflation problem. It is about the Baltic countries and Slovakia. And we have lower inflation than the Visegrad countries.

• We have an analysis that gives us hope that price increases for agri-food products will moderate, maybe there will also be decreases.

• A problem that will persist for another month or two, until domestic production recovers and counterbalances the external situation, is related to the group of vegetables, fruits and eggs.

• We have a serious situation in European vegetable production which has been affected by wide and frequent temperature swings during the winter period and now also by the drought in Spain, which is a large supplier of fruit and vegetables.

• Then in the east of Ukraine which has been and will be again a fruit production and export area, there is fighting going on here and the supply is decreasing.

• And 20% of Turkey’s exports, many coming even to Romania, are affected by the earthquakes in Turkey, which occur in the production and export areas of vegetables.

• We have a significant improvement in Romania’s risk premium, but it is still above Hungary’s risk premium, which also has higher inflation. Now we are also in a certain competition with neighboring countries. And the risk premium in Romania is much higher than in Poland and the Czech Republic. Depending on the risk premium, which of course we are not happy about, because it is still high, the interest rates for Romania’s loans on the international markets are set and they are still comparatively higher.

• However, the risk premium is not linked to the monetary situation and inflation. It is obviously related to the fiscal situation of the country. And there we have to fight, because we are the only country in the EU in the position of excessive deficit and you see how difficult it is to make the correction, the adjustment, for social and political reasons.