"[The central bank's monetary policy] is unsustainable in our view, given the substantial twin deficits and the prospects that they will remain high for at least a few more years," said Valentin Tătaru, chief economist at ING Romania, commenting on the 25bp rate hike operated by Romania's central bank BNR on January 10 - after similar dovish policy pursued since the beginning of the interest rate normalization cycle in the region.

"The big risk with this very gradual normalization is, in our opinion, that inflation will remain entrenched. We see a material risk that inflation will be above the upper limit of 3.5% of the target until 2024," Tătaru said, quoted by Profit.ro.

Such an evolution would mean three consecutive years of missed inflation targets. The central bank's forecast shows that inflation should return to the target band (2.5% +/01pp) in the second half of 2023, after ending 2022 at 5.9%.

The central bank said on January 10 that it expects inflation to be even higher in the short term, compared to its November forecast, amid a stronger rise in electricity and gas prices but also an increase in the price of processed food.

The latest forecast shows a peak of 8.6 % in the spring after the state facilities for the payment of invoices expire.

The banks expect more rate hikes. Erste Bank sees the refinancing rate at 3% by the middle of the year, while ING's estimate is that it will reach 3.5% towards the end of the third quarter.

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andrei@romania-insider.com