Romania’s central bank abandons dovish stance with 50bp rate hike

Romania’s central bank abandons dovish stance with 50bp rate hike
By Iulian Ernst in Bucharest February 10, 2022

Romania’s central bank (BNR) surprised the market again by hiking the refinancing rate by 50bp to 2.5%,  a move that was seen as necessary by most analysts but not expected by many, in the light of the past dovish policy pursued by the monetary authority.

It was a move forced by the rising inflation, analysts commented, revising their expectations for the year-end monetary policy rate in the region of 3.5%-4%.

Ciprian Dascalu, BCR's chief economist, expects the key rate to reach 3.50% by the end of the year. And Valentin Tataru, ING Bank's chief economist, estimates that the key interest rate will reach 4% by the end of 2022, according to Ziarul Financiar daily. Headline inflation exceeded the BNR’s forecast and reached 8.2% at the end of 2021, while CORE2 inflation was 4.7%.

This has reflected the effects of the rise in agri-food commodity prices and energy and transport costs, as well as the influences of persistent bottlenecks in production and supply chains, compounded by increasingly higher short-term inflation expectations and the large share of imported goods in the CPI basket, the BNR explained.

Based on a bleaker inflation outlook and in light of the elevated uncertainty generated by the absorption of EU funds or fiscal stance (notably both linked to the executive) rather than by a new COVID-19 wave, the BNR’s board decided to increase the monetary policy rate to 2.5% per annum from 2.0% per annum as of 10 February and to shift upward accordingly the interest rates corridor to 1.5%/3.5%.

The February 2022 Inflation Report, to be published on February 11, includes a revised scenario showing a considerable worsening of the short-term outlook for inflation, under the strong impact of supply-side shocks, mainly of energy prices.

The forecasted path of the annual CPI rate has been again revised “markedly upwards” over the short-term horizon, the BNR revealed in advance. Specifically, the annual inflation rate is expected to significantly accelerate its growth in 2022 Q2 and thus rise to a double-digit value, mainly as a result of far higher increases in natural gas and electricity prices, which will be strongly manifest after the withdrawal in April of compensation schemes for household consumers.

Moreover, thereafter, the annual inflation rate will decrease probably only gradually, on a much higher-than-previously-forecasted path, but will witness a relatively steep downward adjustment in the first part of next year and return inside the variation band of the target in 2023 Q4, due to sizeable base effects, as well as to far lower values of the aggregate demand surplus foreseen over the forecast horizon.