Romania: NBR holds rates in August
At its 6 August meeting, the National Bank of Romania (NBR) kept the policy rate unchanged at 1.25%. Moreover, the Bank maintained the deposit facility rate at 0.75% and the lending facility (Lombard) rate at 1.75%. 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.
Elevated uncertainty surrounding the country’s economic recovery prompted the Bank to hold its ground, despite notably higher inflation expectations. High-frequency indicators suggest that the recovery carried on in Q2, albeit at a slower sequential pace than in the prior quarter. On the inflation front, building price pressures stemming from higher energy prices in July prompted a marked upward revision to the Bank’s inflation expectations. In its August report, the Bank projected inflation to reach 5.6% and 3.4% in 2021 and 2022, respectively, notably above its previous forecasts of 4.1% and 3.0% for the same years.
Looking ahead, the Bank’s communiqué did not include any strong forward guidance. Similar to the previous meeting, it stressed the elevated uncertainty related to European funds—amid the pending approval of the country’s recovery plan—as well as the spread of the Delta variant of Covid-19 in Europe. Meanwhile, the Bank did not hint at any rate hikes, but committed to preserve “tight control over money market liquidity”, suggesting that it will resort to other monetary policy tools to tame rising inflationary pressures. Against this backdrop, most of our panelists see the Bank keeping the overnight policy rate at 1.25% through year-end.
Commenting on the NBR’s focus on liquidity control, Ciprian Dascalu, chief economist at Erste Bank, said:
“The firm liquidity management came sooner than we expected. This could be explained by the lengthened monetary policy transmission lag after the legislation change a couple of years ago on floating rate loans to retail customers linking them to past (mostly) overnight money market transaction rates. The NBR is likely to aim at targeting household demand via higher short-term rates, without affecting the long-term financing cost for investments, though additional tools and communication efforts are likely to be needed in our view to achieve this thin balance.”
The next monetary policy meeting is scheduled for 5 October.