Romania’s central bank maintained the monetary policy interest rate at 2.25% at its April 4 monetary policy board meeting, despite expectations of the third rate hike this year. 

The decision, seen by some as a result of the government’s pressure, was explained as reflecting the monetary authority’s concerns with the Current Account widening as well as aiming at a better coordination between the monetary policy and the absorption of past decisions by the markets.

The decision in principle puts pressure on the exchange rate, but comments by central bank governor Mugur Isarescu suggest that the Balance of Payment correction by controlled exchange rate depreciation was actually one of the aims of the monetary board. At the same time, the central bank is waiting for interest rates, including deposit interest rates, to absorb the effects of the past rate hikes, Isarescu hinted.

“What I mean is that the things we had in mind were not to stimulate capital inflows and appreciation of the local currency […] A stronger currency is not good for the economy,” Isarescu said. He mentioned that the latest interest rate hike (on February 2) seemed to have strengthened the local currency. Isarescu also commented on the excess of liquidity on the money market and about the expected shift toward higher rates.

“Our message is as follows: this excess of liquidity is largely transitory. Banks need to have a vision. […] interest rates on deposits are well below [central bank’s] lowest interest rate,” Isarescu stressed, adding that the monetary authority expects higher interest rates including on the money market.

The decision indeed occurred amid vocal criticism expressed by the government regarding the monetary policy in general, that it said had failed to curb inflation and furthermore pushed up interest rates.

But Isarescu denied any political dimension to the decision and stressed that, if necessary, the central bank will offset the current fiscal slippages by adopting a tighter monetary policy. Such a situation would not result in the optimisation of macroeconomic developments, but the central bank must target price stability primarily, he explained.

The causes behind the inflation are mixed, with the largest part driven by income (rather than budgetary) policies. But the volatile prices (of food and energy mainly) have also contributed. Romania’s consumer price inflation accelerated from 4.3% y/y in January to 4.7% y/y in February, thus reaching the highest level since June 2013 amid rising energy and food prices magnified by the local currency weakening by 1.3% y/y versus the euro, according to data released by the statistics office on March 13. Fundamentally, core inflation in Romania is driven by GDP rising visibly above the potential rate, which is seen as being anywhere between 3% p.a. under the most conservative estimates and the government’s highly optimistic 5% estimate.

The February inflation figures are in line with the central bank’s scenario, which anticipates an inflationary episode during Q1-Q3 this year (with the 5.1% y/y peak expected at the end of Q2) followed by a gradual deceleration of consumer prices to 3.5% y/y at the end of 2018 and 3.1% y/y one year later.