Romania’s central bank, the National Bank of Romania (BNR) maintained the monetary policy interest rate at 2.5% on August 6, despite analysts’ anticipation the rate would be hiked.

The central bank also decided to leave unchanged the deposit facility rate at 1.5% per annum and the lending facility rate at 3.5% per annum and to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The central bank’s decision to keep the key rate unchanged adds to concerns about overheating, Capital Economic analysts commented.

“Admittedly, recent economic activity data have been weaker than in 2017 and inflation has probably peaked. The NBR [National Bank of Romania] has succeeded in tightening policy via the backdoor. Although the policy rate has only been raised by 75bp since September 2017, one-week interbank rates have risen by about 300bp. All of this probably persuaded the NBR that another rate hike wasn’t necessary today,” the analysts said in a note adding that further hikes are needed to cool the economy. 

The annual CPI inflation rate stopped increasing in June, when it stalled at 5.4%, above the variation band of the inflation target, the central bank said. The stagnation occurred as the impact of the faster annual rise in fuel prices and fruit and vegetables prices was offset by that of the slower growth of tobacco product prices and the slight deceleration in core inflation.

The central bank added that provisional data on first-quarter economic growth point to its moderation to 4% from 6.7% in the last quarter of last year. This development is a return towards the potential rate of increase, being accompanied by a contraction in excess aggregate demand, the BNR said.

“GDP growth remains faster than its potential rate and while inflation will edge down over the coming months, we expect that it will remain above the NBR’s 1.5-3.5% target range until at least late-2019,” Capital Economics analysts said.

The Romanian central bank also examined and approved the August 2018 Inflation Report. The new projection reconfirms the prospects for a decline in Q3 in the annual inflation rate, which is seen remaining above the variation band of the target, before dropping more visibly in the final months of 2018 towards the upper bound of the 1.5%-3.5% target band. The quarterly Inflation Report will be presented on August 8.