Analysts expect a 50bp rate hike (the median expectation in the Bloomberg survey) at the monetary board meeting of the National Bank of Romania (BNR) on November 8, with “significant” chances seen by some for a more hawkish 75bp move, according to a survey among analysts carried out by Ziarul Financiar daily.
BNR increased the policy interest rate by 75bp (rather more than expected) at its latest board meeting in October when it also said that the inflationary outlook had deteriorated.
Analysts expect the end of the monetary tightening cycle soon, including for reasons related to the economic slowdown.
“Given the expected profile of inflation and the very likely slowdown or even contraction of the economy in Q4 and Q1, we believe that the end of the monetary policy tightening cycle is near. Whether it is in November at 6.75% (our estimate) or in January 2023 at 7% is probably less relevant to local rates which tend to correlate more with liquidity conditions than the key rate,” according to ING analyst Valentin Tătaru.
But these are rather conservative forecasts, which incorporate analysts’ perceptions of the BNR’s rather conservative approach. With the core inflation above 11%, however, the situation might change. The inflationary expectations are no longer under the control of the BNR’s rhetoric after the rising inflation has repeatedly invalidated previous projections.
Ciprian Dascălu, BCR's chief economist, expects the BNR to raise the key interest rate by 50bp at 6.75% with “a significant probability” for a 75bp hike based on the inflation figures having exceeded the BNR's August forecast.
Former finance minister and prime minister Florin Citu has argued that the BNR should bring the refinancing rate gradually towards the core inflation, which was over 11% y/y in August if the updated inflation outlook deteriorates compared to past expectations.
Such a deterioration was already hinted at by central bank officials last month.
Fighting inflation despite the government’s preference for more affordable financing costs is a test for the central bank’s independence, Citu stressed, adding that the BNR is waiting in vain to see the executive contributing to price stability through tighter fiscal discipline.
While the BNR and government experts may argue that the inflation is now of an exogenous nature, it is equally true that expected inflation remains a major, if not the largest, contributor to overall inflation.
A wave of wage hikes and price upward corrections is highly likely over the coming couple of months, largely driven not only by the energy and food prices but also by the general expectations for the prolonged inflationary cycle.