Romania rates
(Source: National Bank of Romania)

Romania hikes rates as inflation runs above forecasts

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The National Bank of Romania (BNR) raised its benchmark interest rate to 2% a year from 1.75% a year, starting January 11, 2022, matching the market expectations. The deposit facility rate was kept at 1% whereas the lending (Lombard) facility rate was raised by 50 bps to 3%.

“These decisions are circumscribed to the process of gradual normalisation of the monetary policy conduct that the NBR is carrying out, amid high uncertainties. At the same time, the NBR Board decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions” BNR stated.

The central bank also said it will maintain firm control over money market liquidity as the inflation rate continues to run above forecasts. Romania’s annual inflation rate edged down to 7.8% in November from an over a decade high of 7.94% in October. Food prices increased by 6.10% the most since May 2013, after a 5.25% gain in October, while inflation accelerated for services. On a monthly basis, consumer prices were flat after rising 1.78% in October, National Institute of Statistics data showed.

According to BNR’s current assessments, the annual inflation rate is likely to rise gradually over the months ahead. Behind the worsening of the inflation outlook stand the expected higher increases in electricity and natural gas prices – even amid the implementation of measures to compensate and cap such hikes – as well as in processed food prices, mainly due to the advance in commodity prices, particularly of energy and agri-food. Moreover, uncertainties and risks continue to stem from bottlenecks in global production and supply chains.

“The NBR Board decisions aim to bring back and maintain the annual inflation rate in line with the 2.5 percent ±1 percentage point flat inflation target, inter alia via the anchoring of inflation expectations over the longer time horizon, in a manner conducive to achieving sustainable economic growth in the context of the fiscal consolidation process, while safeguarding financial stability. The NBR closely monitors developments in the domestic and international environment and stands ready to use the tools at its disposal to achieve the fundamental objective of price stability in the medium term” the central bank said.

The next monetary policy meeting of the NBR Board is scheduled for Feb. 9. Ionut Dumitru, Raiffeisen Bank’s chief economist, in a survey conducted by Economica.net  pointed out that Raiffeisen Bank’s forecast envisages a policy interest rate of up to 2.5% by mid-2022 and 3% by the end of 2022.

Romania’s economy advanced 7.4% year-on-year in Q3 of 2021, faster than a preliminary figure of a 7.2% growth but slowing sharply from a 13.9% expansion in the previous period.

Romania could overtake Poland in terms of GDP per capita by the middle of this decade, if it accelerates public sector reforms and digitization, as well as if it pays more attention to investment in research and development, according to Andrei Radulescu, director of Macroeconomic Analysis at Banca Transilvania (BT), Romania’s largest lender by assets.