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Romania Monetary Policy April 2017

Romania: Central Bank keeps rates unchanged at April meeting

At its monetary policy meeting on 4 April, the National Bank of Romania (NBR) decided to keep the policy rate unchanged at 2.25%, surprising market analysts who had expected a rate hike. The NBR also left the reserve requirement on both leu- and foreign-currency denominated liabilities unchanged. Moreover, the Bank decided to leave the deposit facility rate unchanged at 1.25% and the lending facility (Lombard) rate at 3.25%.

Moderating growth in real wages, robust but easing GDP growth, and less accommodative monetary conditions in Q1 underpinned the Bank’s decision. Inflation in February increased to 4.7% from 4.3% in January, moving further above the upper band of the Bank’s target range of 1.5%–3.5%. However, inflation was mainly fueled by base effects associated with cuts in indirect taxes last year, as well as by recent increases in volatile energy prices. Core inflation also increased notably, influenced by robust domestic demand and some weakness in the local currency. However, monetary conditions tightened gradually in Q1, and growth in private sector credit remained contained.

Annual GDP growth decelerated in Q4 2017. Although household spending continued to expand, its contribution to growth declined, while fixed investment growth gained considerable steam. Moving into Q1, wage dynamics have moderated, and growth in retail sales, despite remaining healthy, decelerated notably in February. This could signal consumer spending is cooling, putting less pressure on productive capacity. However, labor market conditions remain tight, and the rebalancing of domestic demand toward fixed investment, if confirmed in the upcoming quarters, could lead to more balanced growth.

The NBR stated that risks to the outlook stem mainly from the fiscal stance, future wage dynamics and volatile administered prices. Moreover, the Bank also referred to the normalization cycle undertaken by major central banks. Despite these risks, it did not provide clear forward guidance in its communiqué, although it declared it would stand ready to use all its available tools to secure price stability, which it sees as a condition for sustainable economic growth.

The next monetary policy meeting is scheduled for 7 May 2018.

Romania Interest Rate Forecast

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