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Romania Monetary Policy July 2022

Romania: NBR delivers surprise 100 basis point hike in July

At its meeting on 6 July, the National Bank of Romania (NBR) raised the policy rate to 4.75% from May’s 3.75%. This decision marked the seventh consecutive hike and the largest one since the 2008 financial crisis, exceeding market expectations. Concurrently, the Bank also raised other key rates: the lending facility (Lombard) rate to 5.75% (May: +4.75%) and the deposit facility rate to 3.75% (May: +2.75%). Meanwhile, the minimum reserve requirement remained unchanged.

Price pressures continued to mount in Q2, outpacing the Bank’s expectations and prompting the acceleration of the tightening cycle: Inflation hit a nearly 20-year high of 14.5% in May due to imported inflation in energy markets. The Bank’s decision was made easier by a stronger-than-expected GDP growth reading in Q1 and an increasingly tight labor market over April–May.

Our panelists forecast another 100 basis points of increases by the end of Q3. They then expect another 100 basis points of tightening in Q4. The Central Bank currently forecasts price pressures to continue growing until September. Fiscal consolidation targets, the absorption of EU recovery funds, developments in commodity prices and the Russia-Ukraine war all threaten to undermine price normalization. The current monetary policy landscape in Central and Eastern Europe will also affect the Central Bank’s upcoming policy decisions, as Romanian interest rates remain significantly below those of the Czech Republic, Hungary and Poland.

Unexpected moves from the European Central Bank, the U.S. Fed and other Central and Eastern European central banks could result in revisions to our panelists’ forecasts.

On the direction and magnitude of upcoming NBR moves, analysts at the EIU noted:

“Romania is facing heightened inflationary pressures, but the NBR has thus far maintained a more dovish stance than its regional peers. […] The war in Ukraine will accelerate the pace of monetary tightening because its upward impact on inflation is likely to be larger than its negative effect on growth. We expect the NBR to raise the policy rate to 5.5% by the end of the third quarter and then to maintain a neutral monetary policy stance until the third quarter of 2023.”

The next monetary policy meeting is scheduled for 5 August.

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