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Romania Monetary Policy October 2021

Romania: NBR unexpectedly hikes rates in October

At its 5 October meeting, the National Bank of Romania (NBR) raised the policy rate to 1.50% from 1.25%. The move, which marked the first hike since 2018, surprised market analysts, who were largely expecting the Bank to stand pat. Moreover, the Bank raised the deposit facility rate to 1.00% from 0.75% and the lending facility (Lombard) rate to 2.00% from 1.75%. That said, it left the reserve requirement ratios for both FX- and leu-denominated liabilities of credit institutions unchanged at 5.00% and 8.00%, respectively.

An upward revision of short-term inflation expectations was largely behind the Bank’s decision to tighten its stance. Headline inflation climbed further above the upper bound of the Central Bank’s 1.5%–3.5% target range in July and August, largely due to external supply-side factors, notably higher energy prices. As these supply-side pressures are expected to persist in the short term, inflation estimates have been significantly revised upwards. Against this backdrop, available indicators suggest that growth accelerated slightly in sequential terms in Q3, which, coupled with private sector credit rising at a double-digit pace in July–August, prompted the Bank to embark on a tightening cycle.

Looking ahead, the Bank’s communiqué did not include any strong forward guidance. The Bank noted that it aims “to bring back and maintain the annual inflation rate in line with the 2.5 percent ±1 percentage point flat inflation target, inter alia via the anchoring of inflation expectations over the longer time horizon”. Meanwhile, the Bank stressed that domestic political turbulence could jeopardize the budget consolidation process and threaten macroeconomic stability.

Commenting on the outlook for monetary policy, Ciprian Dascalu, chief economist at Erste Bank, said:

“By frontloading hikes, the NBR is likely aiming at achieving a lower terminal rate for the current tightening cycle, though this heavily depends on the fiscal outlook. We see the terminal rate in the current cycle at 2.50% being reached by mid-2022 rather than end-2022 as the fiscal consolidation is likely to lag relative to what it was assumed in the previous forecast scenario, given the political uncertainties.”

The next monetary policy meeting is scheduled for 9 November.

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