The escalating crisis in the Middle East is expected to affect Romania’s economy — and other countries in the region — mainly through two channels: higher energy prices sustaining inflation at elevated levels and increased investor risk aversion pushing up borrowing costs.

With the duration and intensity of the conflict still uncertain, the magnitude of the economic impact can only be provisionally estimated.

According to Adrian Codirlașu, president of CFA Romania, the main transmission channel for Romania will be inflation.

“If the current developments continue to escalate, oil prices could rise by 15-20%, including the increase already anticipated by markets before the conflict, and fuel prices could increase by 10-15%,” Codirlașu told Agerpres.

Despite these risks, CFA Romania maintains its forecast of 6-7% year-end inflation. Codirlașu acknowledged that the disinflation process will slow and that inflation could remain close to 10% for longer than previously expected before easing toward the association’s forecast range by the end of the year.

This projection is notably above the National Bank of Romania’s (BNR) latest forecast of 3.9% year-end inflation. Prior to the escalation, analysts had expected the central bank to begin cutting its 6.5% policy rate either in May, according to several local analysts, or later in the year once inflation drops more significantly during the summer months, as projected by Capital Economics.

ING Bank, in a regional assessment, highlighted Romania’s relative vulnerability to energy price shocks. The bank estimates that a 10% increase in oil prices would add approximately 0.5 percentage points to Romania’s inflation rate.

Among regional economies, Turkey is seen as the most exposed, with a 10% oil price increase translating into an additional 1.1 percentage points of inflation. Romania ranks second in sensitivity, followed by Hungary at 0.45 percentage points. Poland and the Czech Republic are viewed as less vulnerable, thanks to lower exchange rate volatility and more diversified energy mixes.

Beyond inflation, rising geopolitical tensions typically trigger greater investor risk aversion. For Romania, this could translate into higher sovereign borrowing costs, reversing the recent downward trend in yields that followed political stabilisation.

Romania’s long-term (10-year) local currency bond yields rose to 6.4% on March 2 from under 6.3% at the end of last week (February 27) – which was the lowest level in several years.

From a monetary policy perspective, ING expects central banks across the region to adopt a cautious stance.

“Central banks are likely to prefer waiting for more clarity, and any immediate decision on interest rate cuts will probably be postponed,” ING analysts noted.

As long as energy markets remain volatile and geopolitical uncertainty persists, both inflation expectations and financial market sentiment are likely to remain fragile, complicating the outlook for growth and monetary easing in Romania.