Romania interest rates

Romania c-bank hikes rates more than expected

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The Board of the National Bank of Romania (NBR) raised the benchmark interest rate by 50 bps to 2.5% on Wednesday (Feb. 9), above expectations.

The move was predicted by only five of the 13 economists surveyed by Bloomberg while 4 out of 7 analysts surveyed by Reuters had expected a quarter percentage point hike, with the median forecast putting the rate at 3.25% at end-2022.

The bank also raised the lending (Lombard) facility rate by 50bps to 3.5% and the deposit facility rate to 1.50% from 1.00%.

Policymakers said the NBR will maintain firm control over money market liquidity and aims to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

“The current scenario, which is based on the available data and the regulations in force, shows a considerable worsening of the short-term outlook for inflation, under the strong impact of supply-side shocks, mainly of energy prices, as the forecasted path of the annual CPI rate has been again revised markedly upwards over the short-term horizon” the NBR said in a statement.

The annual inflation rate climbed to 8.19% in December, from 7.80% in November, and isn’t expected to return within the central bank’s 1.5% to 3.5% target band until the October-December 2023.

In 2021 as a whole, the annual inflation rate added 6.13% points (from 2.06% in December 2020.)

“Specifically, the annual inflation rate is expected to significantly accelerate its growth in 2022 Q2 and thus rise to a double-digit value, mainly as a result of far higher increases in natural gas and electricity prices, which will be strongly manifest after the withdrawal in April of compensation schemes for household consumers.

Moreover, thereafter, the annual inflation rate will decrease probably only gradually, on a much higher-than-previously-forecasted path, but will witness a relatively steep downward adjustment in the first part of next year and return inside the variation band of the target in 2023 Q4.”

The central bank’s bold move brings the benchmark interest rate back to its pre-Covid level, as the BNR tries to catch up with regional peers in Poland, Hungary and the Czech Republic. Those central banks have also stepped up efforts to rein in surging inflation.

The next monetary policy meeting of the NBR Board will be held on April 5. The minutes of discussions underlying the adoption of the monetary policy decision during Tuesday’s meeting will be published Feb. 21. An updated inflation forecast will be released on Feb. 11.

The Romanian leu was flat against the euro.