Romania's July inflation eases to 8.16%, but drought and politics weigh on outlook

Romania's annual inflation rate eased to 8.16% in July, down from 10.42% in June, according to official data released on Wednesday. The figure, however, came in slightly above the 7.9% that analysts had projected, with prices rising 0.58% on a monthly basis.

The sharp deceleration is largely attributed to a fading base effect from a year earlier, when electricity prices spiked following the expiry of a government price-capping scheme. The annual rate is expected to moderate further next month as the impact of a value-added tax hike also drops out of the calculation.

Despite the cooling headline numbers, underlying pressures persist. Energy costs have climbed this year amid the ongoing conflict involving Iran, while a record-low Danube River—caused by severe drought—has curtailed domestic power generation, forcing Romania to rely on costlier imports to bridge the gap.

The central bank, which kept its benchmark interest rate unchanged at 6.5%—the highest in the European Union—on Monday, now expects inflation to return to its 1.5%-3.5% target range by the end of next year, a delay of one quarter from its earlier projection. It currently sees inflation at 5.5% by December and 2.9% by the end of 2027. Fresh forecasts are due on Thursday.

The economic picture is further complicated by political instability. The collapse of a broad pro-European coalition government in May and two failed attempts to form a replacement have added uncertainty to the outlook.

Analysts surveyed by Varta Wire do not anticipate any rate cuts before the first quarter of next year. Erste Bank, in a research note, flagged electricity prices, the knock-on effects of the drought, and volatile global fuel prices as the main risks, predicting the key rate will remain at 6.50% until May 2027.