BUCHAREST (Reuters) -Romania's central bank lifted its inflation forecasts for this year and next on Monday as supply-side shocks and war in Ukraine drive stronger-than-expected price growth. Energy costs and their transmission to other prices have significantly overshot the central bank's expectations, Governor Mugur Isarescu told a news conference. The new forecasts see annual inflation at 16.3% in December, compared with a previous forecast of 13.9%. Inflation is now seen at 11.2% at end-2023, compared with a previous forecast of 7.5%. Isarescu said the forecasts did not take into account changes to an energy support scheme for homes and businesses approved by the government on Friday, which partially regulates its power market until March 2025.
He added a preliminary calculation showed inflation could fall to 7.2% at the end of 2023 based on the energy changes, which still require parliamentary approval.
Isarescu said the Romanian central bank's relatively slow approach to monetary policy tightening had worked, with interest rates now catching up with levels seen in some other central European countries.
"We haven't made statements like policymakers in Poland and Hungary that we will no longer hike," Isarescu said.
"We moved gradually, we have tried not to hurt the economy and more importantly to give leu borrowers time to get used to higher interest rates."
Romania's policymakers earlier this month raised the benchmark interest rate by 50 basis points to 6.75%, winding down their pace of tightening in line with others in central Europe after a year of sharp hikes. Romanian rates, after hikes totaling 550 basis points, are at their highest in over a decade while inflation is at over 15%.
Isarescu also said the bank would allow more leu exchange rate flexibility, adding the currency's stability had contributed to a deepening current account deficit.
The Romanian leu traded down 0.2% against the euro at 1315 GMT. "Our baseline scenario is that the rate hike cycle is over," said Ciprian Dascalu, chief economist at BCR bank in Bucharest.
However he did not rule out a 25 basis point hike in January in the event of high exchange rate pressures or inflationary surprises on the upside.