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Romania Monetary Policy November 2021

Romania: NBR delivers second consecutive hike in November

At its 9 November meeting, the last for the year, the National Bank of Romania (NBR) raised the policy rate to 1.75% from 1.50%. The move marked the second consecutive hike, but undershot market analysts’ expectations of a steeper hike. Moreover, the Bank maintained the deposit facility rate stable at 1.00% but hiked the lending facility (Lombard) rate to 2.50% from 2.00%. Lastly, it left the reserve requirement ratios for both FX- and leu-denominated liabilities of credit institutions unchanged at 5.00% and 8.00%, respectively. Markedly higher-than-anticipated inflationary pressures were behind the Central Bank’s decision to extend its tightening cycle. Headline inflation overshot the Bank’s forecasts in September and October, as exogenous factors, notably higher prices for energy, continued to exert upward pressure. Similarly, core inflation also trended upwards in the third quarter, due to higher costs for transportation and agricultural products. Against this backdrop, the Bank now expects inflation to continue rising until mid-2022, amid the ongoing power crunch and estimates for higher energy prices ahead. In H2 2022, inflation is seen gradually easing before returning within the Central Bank’s 1.5%–3.5% target range in Q3 2023.

Once again, the Bank’s communiqué did not include any strong forward guidance. The Bank reiterated its commitment to bring inflation within target “in a manner conducive to achieving sustainable economic growth”. Meanwhile the Bank stressed that downside risks persist, particularly related to the absorption of EU recovery funds and uncertainty over 2021’s pending second budget revision and next year’s budget. Our panelists expect several rate hikes next year.

With regards to the inflation and monetary policy outlook, Kevin Daly and Madhvee Bangur, analysts at Goldman Sachs, said:

“On our forecasts, we expect inflation to average +5.0%yoy in 2021 and +6.0%yoy in 2022—both significantly overshooting the upper bound of the NBR’s target variation band (2.5% ± 1pp). Against this backdrop, we expect the NBR to accelerate the pace of tightening in 2022Q1 and for rates to reach 3.50% by mid-2022.”

The next monetary policy meeting is scheduled for 10 January 2022.

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