Romania: Central Bank shows first signs of a tightening at October meeting
October 3, 2017
At its monetary policy meeting on 3 October, the National Bank of Romania (NBR) decided to keep the policy rate unchanged at 1.75%, where it has remained since May 2015. The decision was widely in line with market expectations. The Bank also left the reserve requirement on both leu- and foreign currency-denominated liabilities unchanged. However, the bank decided to narrow the interest-rate liquidity corridor for the standing facilities to plus or minus 1.25 percentage points (previously: plus or minus 1.50 percentage points). As a result, the deposit facility rate increased to 0.50%, while the NBR lending facility (Lombard) rate was lowered to 3.00%.
The Bank’s decision came amid increasing price pressures, as inflation rose sharply in the beginning of Q3 but decreased slightly in August. Inflation now lies within the Bank’s target band of 1.5–3.5%. The Bank noted that it expects inflation to continue to rise over the medium-term at a faster rate than previously expected. Inflation is being pushed up by robust domestic demand and strong economic growth. GDP growth in Q2 was fueled by an impressive expansion in private consumption. Increasing price pressures on administered prices for natural gas, electricity, as well as volatile food prices, are also expected to drive inflation. The Bank noted that uncertainties in economic growth in the Euro area as well as decisions by the ECB and the Fed pose risks to Romanian economic growth. The NBR decided to keep its policy rate accommodative in order to encourage inflation to rise closer to its target rate of 2.5%.
The Bank’s decision to narrow the interest-rate corridor was made in order to try to curb rising interbank interest rates and improve liquidity conditions. It could be its first step towards a tightening in the future. Faster-than-expected inflation combined with a depreciating leu could prompt the Bank to raise the policy rate before year-end or at the outset of 2018. This matches FocusEconomics panelists’ predictions of gradually rising inflation, and a subsequent rise in the policy rate in 2018 in order to moderate inflation.
The next monetary policy meeting is scheduled for 7 November.