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Romania Monetary Policy May 2022

Romania: NBR speeds up policy tightening with sixth consecutive rate hike in May

At its meeting on 10 May, the National Bank of Romania (NBR) raised the policy rate to 3.75% from April’s 3.00%, thus marking the sixth successive hike. The move was the first 75 basis point hike and somewhat exceeded market expectations. Concurrently, the Bank also raised other key rates: the lending facility (Lombard) rate to 4.75% (April: +4.00%) and the deposit facility rate to 2.75% (April: +2.00%). Meanwhile, the minimum reserve requirement remained unchanged.

Staggeringly high and rising price pressures motivated the hawkish policy move, as inflation continued to outpace the Bank’s expectations: The headline inflation rate jumped to 13.8% in April (March: +10.2%), marking an 18-year high. Higher food and energy prices due to supply-side shocks exacerbated by the war in Ukraine contributed to the elevated reading. Meanwhile, the “considerable worsening” of inflation expectations for the upcoming months justified the higher-than-expected rate increase. That said, Romania’s monetary policy tightening still lags behind that of most regional peers who have also succumbed to the inflationary wave.

Looking ahead, the Bank conveyed a fairly pessimistic outlook on inflation prospects, forecasting a return to single-digit rates no earlier than the second half of 2023. Fiscal consolidation targets, the absorption of EU recovery funds, developments in commodity prices and the Russia-Ukraine war will continue to pose significant risks to price normalization. Moreover, the current monetary policy landscape in Central and Eastern Europe will also affect the NBR’s upcoming policy decisions, as the Czech Republic, Hungary and Poland continue their tightening cycles. Taken together, these factors will almost certainly motivate additional rate increases later this year. Indeed, immediately prior to the 10 May meeting, our panelists forecasted several more rate hikes this year, expecting additional increases of up to 175 basis points from current levels by the end of 2022.

On the driving forces behind the Bank’s current and upcoming decisions, Erste Group’s analyst Eugen Sinca commented:

“The recent decisions in Poland and Czechia added pressure on the NBR for a bolder move as interest rates were already lagging peers. Moreover, after today’s board meeting the next NBR monetary policy decision is scheduled for 6 July, while in the meantime other CEE central banks have meetings at which are expected to further raise rates. NBR specifically mentioned in its press release that the level and pace of increase of key rates by central banks in Czechia, Poland and Hungary are particularly relevant, besides the ECB’s and the Fed’s prospective monetary policy stances.”

The next monetary policy meeting is scheduled for 6 July 2022.

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