Romania: NBR stands pat in July
At its 7 July meeting, the National Bank of Romania (NBR) maintained the policy rate at 1.25%, in line with market expectations. 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.
The Bank’s decision to maintain its accommodative stance was underpinned by signs of an ongoing, albeit fragile, recovery in the second quarter and came despite higher-than-anticipated inflation expectations. Early indicators suggest that activity continued to improve throughout Q2, albeit at a softer pace in quarter-on-quarter terms. However, the Bank stressed that downside risks remain: Persistent uncertainty surrounding the pandemic—in light of a falling domestic vaccination rate and the spread of more infectious variants—as well as lingering risks related to the absorption of EU recovery funds, meant that a rate hike would have been premature. Meanwhile, on the price front, inflation is expected to overshoot the Bank’s short-term projections, chiefly due to supply-side pressures stemming from higher energy prices.
Looking ahead, the Bank’s communiqué did not include any strong forward guidance. However, during the accompanying press conference, Central Bank Governor Mugur Isarescu noted that the likelihood of a rate hike in August’s meeting is low. Nonetheless, Isarescu stressed that the current policy cycle is coming to an end. Meanwhile, most of our panelists see the Bank keeping the overnight policy rate at 1.25% through year-end.
Commenting on the inflation outlook, Valentin Tataru, chief Romania economist at ING, noted:
“So far, the Central Bank reaction to higher inflation has been relatively limited, which we expect to be the case for the rest of 2021. A firmer grip on the liquidity situation will likely continue to be employed, better anchoring carry rates around the 1.25% key rate. Straightforward rate hikes will probably be considered in H1 2022, when we predict a relatively modest 50 basis-point hiking cycle. Should inflation be more demand-driven earlier than currently expected, we might see rate hikes starting as soon as Q4 2021.”
Eugen Sinca, analyst at Erste Bank, expects rate hikes to be driven by the movements of other central banks in the region:
“We recently brought forward the first key rate hike in our forecast, to Q3 2022 from early 2023. The Romanian economy is gradually emerging from the corona crisis and other central banks in the CEE region already embarked on a tightening mode. The NBR is monitoring peer central banks, particularly the Polish Central Bank, for direction. Since the National Bank of Poland could deliver a rate hike in Q4 2021 or early 2022, the NBR could commit to firm liquidity management early next year. This is likely to be the start of the tightening cycle, ahead of rate hikes which could be delayed into Q3 2022.”
The next monetary policy meeting is scheduled for 6 August.