Romania’s central bank hikes refinancing rate by 75bp to 3.75%; more to come

The National Bank of Romania (BNR) on May 10 increased the monetary policy interest rate by 75bp to 3.75% and announced that the updated forecast, to be released on May 12, shows a renewed considerable worsening of the outlook for inflation. The Lombard interest rate consequently hit 4.75%.

The rate hike may not be disappointing in itself, although analysts believed a 100bp hike is possible as well, but the final level of the refinancing rate, in the inflationary context (persistent double-digit inflation rates) and compared to other peer monetary authorities in the region (5.25% in Poland, 5.75% in the Czech Republic), seems insufficient. Thus, the rising interest rates will predictably push up the financing cost (including for the Government), while on the other hand, the (ex-ante) deposit interest rates remain negative.

Specifically, the annual inflation rate (10.2% in March) is expected to accelerate its growth in Q2 and decline only gradually in the next four quarters but more steeply thereafter. As a result, the inflation dynamics will probably climb considerably above the previously-forecasted levels and will fall to one-digit levels no sooner than 2023 H2, remaining above the variation band of the target at the end of the projection horizon, BNR says in the note released along with the monetary policy decision.

As regards the economic growth, the BNR says that the latest statistical data and analyses point to a slight re-acceleration of economic growth in Q1, followed, however, by a quasi-standstill in Q2, under the impact of the war in Ukraine and the associated sanctions.

The next ordinary monetary board meeting is scheduled for July 6. BNR is highly likely to operate more rate hikes this year, and an extraordinary meeting may be needed to fine-tune the monetary policy before early July.

“We see the terminal rate at 5.50% for the key rate and 6.50% for the credit facility by the end of this year,” Erste Group says in a note to investors sent along with BNR’s rate hike decision.

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