Romania: Central Bank raises rates at May meeting
At its monetary policy meeting on 7 May, the National Bank of Romania (NBR) decided to raise the policy rate to 2.50% from 2.25%, as largely expected by market analysts. Moreover, the Bank decided to hike the deposit facility rate to 1.50% from 1.25% and the lending facility (Lombard) rate to 3.50% from 3.25%. The NBR left the reserve requirement on both leu- and foreign-currency denominated liabilities unchanged.
Rising inflationary pressures and robust economic growth underpinned the Bank’s decision. Inflation in March increased to 5.0% (February: 4.7%), moving further above the upper band of the Bank’s target range of 1.5%–3.5%. Inflation was fueled by supply-side factors, as well as by recent increases in volatile energy prices. Core inflation also increased notably, influenced by robust domestic demand, some weakness in the local currency and rising production costs. However, monetary conditions continued to tighten in April following the NBR’s deposit-taking operations, although growth in consumer credit strengthened.
Economic activity, although gradually moderating, continued to expand at a solid pace in Q1. Consumer spending kept increasing, as suggested by healthy, albeit moderating, growth in retail sales throughout the first quarter. Household spending was again supported by strong wage growth and a record-low unemployment rate. However, the recent cooling in private consumption suggests the economy is hitting capacity constraints, creating the conditions for further economic imbalances. Data for industrial production in the first two months of the year confirms such a pattern, highlighting the need for the NBR to prevent further economic overheating.
The NBR expects inflation to stay above its target range in the coming months and to approach the upper band of the range by year-end. The Bank stated that risks to the outlook stem mainly from administered prices, future wage dynamics and oil prices. In its communiqué it declared it will secure price stability, which it sees as a condition for sustainable economic growth, and called for structural reforms to strengthen the country’s productive capacity.
The next monetary policy meeting is scheduled for 4 July 2018.